E TRADE Financial Corp. Annual Report 2011

FY2011 Annual Report · E TRADE Financial Corp.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011
or
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number 1-11921

E*TRADE Financial Corporation

(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or other jurisdiction
of incorporation or organization)

94-2844166
(I.R.S. Employer
Identification Number)

1271 Avenue of the Americas, 14th Floor, New York, New York 10020
(Address of principal executive offices and Zip Code)
(646) 521-4300
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the act:

Title of Each Class
Common Stock, par value $0.01 per share

Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
NASDAQ Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes È No ‘

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes ‘ No È

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes È No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendments to this Form 10-K. È

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.

Large accelerated filer È
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant

Yes ‘ No È

is a shell company (as defined in Rule 12b-2 of the Exchange Act).

‘
Accelerated filer
Smaller reporting company ‘

At June 30, 2011, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $3.0
billion (based upon the closing price per share of the registrant’s common stock as reported by the NASDAQ Global Select Market
on that date). Shares of common stock held by each officer, director and holder of 5% or more of the outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of February 17, 2012, there were 285,676,649 shares of common stock outstanding.

Certain portions of the definitive Proxy Statement related to the Company’s 2012 Annual Meeting of Shareholders, to be filed

hereafter (incorporated into Part III hereof).

DOCUMENTS INCORPORATED BY REFERENCE

E*TRADE FINANCIAL CORPORATION
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 2011
TABLE OF CONTENTS

PART I
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Business
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Products and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and Customer Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment Results Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concentrations of Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary of Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statistical Disclosure by Bank Holding Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Management Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . .
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 1—Organization, Basis of Presentation and Summary of Significant Accounting
Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 2—Facility Restructuring and Other Exit Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 3—Operating Interest Income and Operating Interest Expense . . . . . . . . . . . . . . . . . . .
Note 4—Fair Value Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 5—Available-for-Sale and Held-to-Maturity Securities . . . . . . . . . . . . . . . . . . . . . . . . .
Note 6—Loans Receivable, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1
1
1
1
2
4
4
5
5
7
8
19
20
20

25
27

29
29
33
46
51
55
60
63
72
80
85
90
92
92
93
95
96
97
98
100
102

102
111
112
113
121
125

Note 7—Accounting for Derivative Instruments and Hedging Activities . . . . . . . . . . . . . . .
Note 8—Property and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 9—Goodwill and Other Intangibles, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 10—Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 11—Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 12—Securities Sold Under Agreements to Repurchase and FHLB Advances and
Other Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 13—Corporate Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 14—Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 15—Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 16—Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 17—Earnings (Loss) per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 18—Employee Share-Based Payments and Other Benefits . . . . . . . . . . . . . . . . . . . . . .
Note 19—Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 20—Lease Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 21—Commitments, Contingencies and Other Regulatory Matters . . . . . . . . . . . . . . . .
Note 22—Segment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 23—Condensed Financial Information (Parent Company Only) . . . . . . . . . . . . . . . . . .
Note 24—Quarterly Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

PART IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

133
136
137
138
138

140
142
144
145
149
151
151
154
155
155
161
163
166

166
166
167

168
171

Unless otherwise indicated, references to “the Company,” “we,” “us,” “our” and “E*TRADE” mean
E*TRADE Financial Corporation and its subsidiaries.

E*TRADE, E*TRADE Financial, E*TRADE Bank, Equity Edge, OptionsLink and the Converging Arrows

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

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements involving risks and uncertainties. These statements relate to
our future plans, objectives, expectations and intentions. These statements may be identified by the use of words
such as “expect,” “may,” “anticipate,” “intend,” “plan” and similar expressions. Our actual results could differ
materially from those discussed in these forward-looking statements, and we caution that we do not undertake to
update these statements. Factors that could contribute to our actual results differing from any forward-looking
statements include those discussed under Risk Factors, Management’s Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report. The cautionary statements made in this report
should be read as being applicable to all forward-looking statements wherever they appear in this report. We further
caution that there may be risks associated with owning our securities other than those discussed in such filings.

ITEM 1. BUSINESS

OVERVIEW

E*TRADE Financial Corporation is a financial services company that provides online brokerage and related
products and services primarily to individual retail investors under the brand “E*TRADE Financial.” Our
primary focus is to profitably grow our online brokerage business, which includes our self-directed trading and
investing customers. We also provide investor-focused banking products, primarily sweep deposits and savings
products, to retail investors. Our competitive strategy is to attract and retain customers by emphasizing value
beyond price, ease of use and innovation, with delivery of our products and services primarily through online and
technology-intensive channels.

Our corporate offices are located at 1271 Avenue of the Americas, 14th Floor, New York, New York 10020.
We were incorporated in California in 1982 and reincorporated in Delaware in July 1996. We have approximately
3,200 employees. We operate directly and through numerous subsidiaries many of which are overseen by
governmental and self-regulatory organizations. Our most significant subsidiaries are described below:

• E*TRADE Bank is a federally chartered savings bank that provides investor-focused banking products
to retail customers nationwide and deposit accounts insured by the Federal Deposit Insurance
Corporation (“FDIC”);

• E*TRADE Securities LLC is a registered broker-dealer and is a wholly-owned operating subsidiary of

E*TRADE Bank. It is the primary provider of brokerage products and services to our customers;

• E*TRADE Clearing LLC is the clearing firm for our brokerage subsidiaries and is a wholly-owned
operating subsidiary of E*TRADE Bank. Its main purpose is to transfer securities from one party to
another; and

• E*TRADE Capital Markets, LLC is a registered broker-dealer and market maker.

A complete list of our subsidiaries can be found in Exhibit 21.1.

We provide services to customers in the U.S. through our website at www.etrade.com. In addition to our
website, we also provide services through our network of customer service representatives,
investment
professionals and investment advisors. We also provide these services over the phone or in person through our 28
E*TRADE branches. Information on our website is not a part of this report.

STRATEGY

Our core business is our trading and investing customer franchise. Building on the strengths of this franchise,

our growth strategy is focused on:

•

Strengthening our overall financial and franchise position. We are focused on strengthening our overall
capital structure and continuing to mitigate credit losses in our loan portfolio. We are also focused on
positioning the Company for future growth and maintaining disciplined expense management.

•

Improving our market position in our retail brokerage business. We plan to grow our customer base by
continuing to increase our sales force, focus on long-term investing and develop innovative products
and services.

• Accelerating the growth of our corporate services and market making businesses. Our corporate
services and market making businesses enhance our strategy by allowing us to realize additional
economic benefit from our retail brokerage business.

• Enhancing our position with long-term investors. We believe growing our investing and retirement
products and services is key to our long term success. Our primary focus is to expand the reach of our
brand along with the awareness of our products to this key customer segment.

• Optimizing the value of our bank franchise. Our retail brokerage business generates a significant amount
of customer cash and we plan to continue to utilize our bank to optimize the value of these customer
deposits.

PRODUCTS AND SERVICES

We assess the performance of our business based on our segments, trading and investing and balance sheet
management. We consider multiple factors, including the competitiveness of our pricing compared to similar
products and services in the market, the overall profitability of our businesses and customer relationships when
pricing our various products and services. We manage the performance of our business using various customer
activity and financial metrics, including daily average revenue trades (“DARTs”), average commission per trade,
margin receivables, end of period brokerage accounts, net new brokerage accounts, customer assets, net new
brokerage assets, brokerage related cash, corporate cash, E*TRADE Financial Tier I leverage and common
ratios, E*TRADE Bank Tier I capital ratio, special mention loan delinquencies, allowance for loan losses,
enterprise net interest spread and average enterprise interest-earning assets. Costs associated with certain
functions that are centrally-managed are separately reported in a corporate/other category.

Trading and Investing

Our trading and investing segment offers a full suite of financial products and services to individual retail

investors. The most significant of these products and services are described below:

Trading Products and Services

•

automated order placement and execution of U.S. equities, futures, options, exchange-traded funds and
bond orders;

FDIC insured sweep deposit accounts that automatically transfer funds to and from customer brokerage
accounts;

access to E*TRADE Mobile, which allows customers to securely trade stocks and options, monitor
real-time investment, market and account
information and transfer funds between accounts via
iPhone®, iPad®, AndroidTM or BlackBerry® smartphone;

use of Power E*TRADE Pro, our desktop trading software for qualified active traders, which provides
customers with customization capabilities, an expanded feature set and more news and information,
plus live streaming news via CNBC TV;

an open applications programming interface (“Open API”) for third-party and independent software
developers, which allows customers to have access to technical information and documentation,
reference guides, and other resources to help network external applications and programs with our
active trader platform;

two-second execution guarantee on all qualified market orders for Standard & Poor’s (“S&P”) 500
stocks and exchange-traded funds;

• margin accounts allowing customers to borrow against their securities;

•

cross-border trading, which allows customers residing outside of the U.S. to trade in U.S. securities;

access to international equities in Canada, France, Germany, Hong Kong, Japan and the United
Kingdom and foreign currencies, including the Canadian dollar, Euro, Hong Kong dollar, Yen and
Sterling; and

research and trading idea generation tools that assist customers with identifying investment
opportunities including Analyst and Technical research, Consensus Ratings, and market commentary
from Morningstar, Dreyfus and BondDesk Group.

Long-Term Investing Products and Services

•

use of the Investor Resource Center, which provides an aggregated view of our investing tools, market
insights, independent research, education and other investing resources;

flexible advisory services through Online Advisor, our investment advice tool designed to provide
investors with actionable investment guidance, including recommended asset allocations ranging from
fully self-directed investing to 100 percent discretionary portfolio management from an affiliated
registered investment advisor;

fixed income tools in our Bond Resource Center aimed at helping customers identify, evaluate and
implement fixed income investment strategies;

retirement planning resources including Retirement QuickPlan, an easy-to-use, four-step calculator that
provides a customized action plan to help customers get on track with personal retirement savings
goals, and access to Chartered Retirement Planning CounselorsSM who can provide customers with
one-on-one portfolio recommendations and personalized plans;

• managed investment portfolio advisory services with an investment of $25,000 or more from an
advisor, which provides one-on-one professional portfolio

affiliated registered investment
management;

•

unified managed account advisory services with an investment of $250,000 or more from an affiliated
registered investment advisor, which provides customers the opportunity to work with a dedicated
investment professional
integrated approach to asset allocation,
investments, portfolio rebalancing and tax management;

to obtain a comprehensive,

no fee and no minimum individual retirement accounts; plus, Rollover Specialists to guide customers
through the rollover process;

access to more than 1,000 non-proprietary exchange-traded funds and over 8,000 non-proprietary
mutual funds;

investing and trading educational services via online videos, web seminars and web tutorials; and

FDIC insured deposit accounts, including checking, savings and money market accounts.

Corporate Services

We offer software and services for managing equity compensation plans for corporate customers. Our Equity
Edge platform facilitates the management of employee option plans, employee stock purchase plans and restricted
stock plans, including necessary accounting and reporting functions. This is a product of the trading and investing
segment since it serves as an introduction to E*TRADE for many employees of our corporate customers who
conduct equity option and restricted stock transactions, with our goal being that these individuals will also use our
other products and services. Our corporate services business received top ratings in overall satisfaction and loyalty
among broker plan administrators by Group Five, an independent consulting and research firm, in its 2011 Stock
Plan Administration Benchmarking Study.

Market Making

Our trading and investing segment also includes market making activities which match buyers and sellers of
securities from our retail brokerage business and unrelated third parties. As a market maker, we take positions in
securities and function as a wholesale trader by combining trading lots to match buyers and sellers of securities.
Trading gains and losses result from these activities. Our revenues are influenced by overall trading volumes,
trade mix and the number of stocks for which we act as a market maker and the trading volumes and volatility of
those specific stocks.

Balance Sheet Management

The balance sheet management segment consists of the management of our balance sheet, focusing on asset
allocation and managing credit, liquidity and interest rate risks. The balance sheet management segment manages
loans previously originated or purchased from third parties as well as our customer cash and deposits, which
originate in the trading and investing segment.

For additional statistical information regarding products and customers, see Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (“MD&A”) beginning on page 29. Three years of
segment financial performance and data can be found in the MD&A beginning on page 46 and in Note 22—
Segment Information of Item 8. Financial Statements and Supplementary Data beginning on page 161.

SALES AND CUSTOMER SERVICE

We believe providing superior sales and customer service is fundamental to our business. Growing our sales
force with a focus on long-term investing is one of the key factors in our growth strategy. We also strive to maintain
a high standard of customer service by staffing the customer support team with appropriately trained personnel who
are equipped to handle customer inquiries in a prompt yet thorough manner. Our customer service representatives
utilize our proprietary web-based platform to provide customers with answers to their inquiries. We also have
specialized customer service programs that are tailored to the needs of each customer group.

We provide sales and customer support through the following channels of our registered broker-dealer and

investment advisory subsidiaries:

• Branches—we have 28 branches located in the U.S. where retail investors can go to service any of their
needs while receiving face to face customer support. Financial consultants are also available on-site to
help customers assess their current asset allocation.

• Online—we have an Online Advisor tool available that provides asset allocation and a range of
investment solutions that can be managed online or through a dedicated investment professional. We also
have an online service center where customers can request services on their accounts and obtain answers
to frequently asked questions. The online service center also provides customers with the ability to send a
secure message to one of our customer service representatives.

•

Telephonic—we have a toll free number that connects customers to an automated phone system which
will help ensure that they are directed to the appropriate department where a financial consultant or
licensed customer service representative can assist with their inquiry.

TECHNOLOGY

We believe our focus on being a technological leader in the financial services industry enhances our
competitive position. This focus allows us to deploy a secure, scalable technology and back office platform that
promotes innovative product development and delivery. We continued to increase our investments in these
critical platforms in 2011, helping to drive significant efficiencies as well as enhancing our service and
operational support capabilities. Our technology platform also enabled us to deliver trading and investing
functionality with the introduction of Open API, mobile offerings across new devices and the Equity Edge Online
platform.

COMPETITION

The online financial services market continues to evolve rapidly and we expect it to remain highly
competitive. Our trading and investing segment competes with full commission brokerage firms, discount
brokerage firms, online brokerage firms, Internet banks, traditional “brick & mortar” retail banks and thrifts and
market making firms. Some of these competitors provide Internet trading and banking services, investment
advisor services, touchtone telephone and voice response banking services, electronic bill payment services and a
host of other financial products. Our balance sheet management segment competes with investment banking
firms and other users of market liquidity, in addition to the competitors above, in its quest for the least expensive
source of funding.

The financial services industry has become more concentrated as companies involved in a broad range of
financial services have been acquired, merged or have declared bankruptcy. During the past four years, this trend
accelerated considerably as a significant number of U.S. financial institutions consolidated, were forced to
merge, or received substantial government assistance. We believe we can continue to attract customers by
appealing to retail investors by providing them with easy to use and innovative financial products and services.

We also face competition in attracting and retaining qualified employees. Our ability to compete effectively
in financial services will depend upon our ability to attract new employees and retain and motivate our existing
employees while efficiently managing compensation related costs.

REGULATION

Our business is subject to regulation by U.S. federal and state regulatory and self-regulatory agencies and
securities exchanges and by various non-U.S. governmental agencies or regulatory or self-regulatory bodies,
securities exchanges and central banks, each of which has been charged with the protection of the financial
markets and the protection of the interests of those participating in those markets.

Our regulators, rulemaking agencies and primary securities exchanges in the U.S. include, among others, the
Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”), the
New York Stock Exchange (“NYSE”), the National Association of Securities Dealers Automated Quotations
(“NASDAQ”), the FDIC, the Federal Reserve, the Municipal Securities Rulemaking Board, the Office of the
Comptroller of the Currency (“OCC”) and the Consumer Financial Protection Bureau (“CFPB”).

Both our brokerage and banking entities are subject to the Bank Secrecy Act, as amended by the USA
PATRIOT ACT of 2001 (“BSA/USA PATRIOT Act”), which contains anti-money laundering and financial
transparency laws. In order to comply with the BSA/USA PATRIOT Act, we have established an Anti-Money
Laundering (“AML”) unit which is responsible for developing and implementing enterprise-wide programs for
compliance with the various anti-money laundering and counter-terrorist financing laws and regulations.

For customer privacy and information security, under the rules of the Gramm-Leach-Bliley Act of 1999, our
brokerage and banking entities are required to disclose their privacy policies and practices related to sharing
customer information with affiliates and non-affiliates. The rules also give customers the ability to “optout” of
having non-public information disclosed to third parties or receiving marketing solicitations from affiliates and
non-affiliates based on non-public information received from our brokerage and banking entities.

Brokerage Regulation

Our broker-dealers are registered with the SEC and are subject to regulation by the SEC and by self-regulatory
organizations, such as FINRA and the securities exchanges of which each is a member, as well as various state
regulators. Such regulation covers all aspects of the brokerage business, including, but not limited to, client
protection, net capital requirements, required books and records, safekeeping of funds and securities, trading,

prohibited transactions, public offerings, margin lending, customer qualifications for margin and options
transactions, registration of personnel and transactions with affiliates. Our international broker-dealers are regulated
by their respective local regulators such as the United Kingdom Financial Services Authority (“FSA”) and
Hong Kong Securities & Futures Commission.

Banking Regulation

Our banking entities are subject to regulation, supervision and examination for safety and soundness by the
OCC, the Federal Reserve, the FDIC and by the CFPB for compliance with federal consumer finance laws. Such
regulation covers all aspects of the banking business, including lending practices, safeguarding deposits, customer
privacy and information security, capital structure, transactions with affiliates and conduct and qualifications of
personnel.

Each of our banking entities has deposits insured by the FDIC and pays quarterly assessments to the Deposit
Insurance Fund (“DIF”), maintained by the FDIC, to pay for this insurance coverage. As of April 1, 2011, the
assessment base for insured depository institutions was changed from domestic deposits, with some adjustments, to
average consolidated total assets minus average tangible equity. The FDIC also changed its methodology for
calculating the assessment rate for E*TRADE Bank and other large and highly complex depository institutions. The
new risk-based assessment utilizes a scorecard method for calculating a large depository institution’s assessment
rate based on a number of factors, including the institution’s CAMELS ratings, asset quality and brokered deposits.
The FDIC will continue to assess the changes to the assessment rates at least annually.

Financial Regulatory Reform Legislation and Basel III Accords

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law
on July 21, 2010 and includes comprehensive changes to the financial services industry. Under the Dodd-Frank Act,
our primary federal bank regulator, the Office of Thrift Supervision (“OTS”), was abolished in July 2011. The OTS’
regulatory oversight responsibilities for the thrifts and parent company were transferred to the OCC and Federal
Reserve, respectively. In addition, the CFPB will oversee compliance by the Company with federal consumer
finance laws. Although the Dodd-Frank Act maintains the federal thrift charter, and retains the previous lending and
investment limitations for thrifts, it eliminates certain benefits of the charter. The Dodd-Frank Act also requires all
companies, including savings and loan holding companies, that directly or indirectly control an insured depository
institution to serve as a source of strength for the institution.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, the
details, substance and impact of which may not be known for months or years. However, the implementation of
holding company capital requirements will impact us as the parent company was not previously subject to capital
requirements. We believe the requirements are an important measure of our capital strength and we are monitoring
these requirements internally, using the current capital ratios that apply to bank holding companies, as the
requirements are expected to become effective by July 2015. We are currently in compliance with the current
capital requirements that apply to bank holding companies, and we have no plans to raise additional capital as a
result of this new law.

The current risk-based capital guidelines that apply to E*TRADE Bank are based upon the 1988 capital
accords of the International Basel Committee on Banking Supervision (“BCBS”), a committee of central banks
and bank supervisors, as implemented by the U.S. federal banking agencies, including the OCC, commonly
known as Basel I. In September, 2010, the Group of Governors and Heads of Supervision, the oversight body of
the BCBS, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital
and liquidity requirements, known as the Basel III Accords. The final Basel III Accords were released in
December, 2010 and are subject to individual adoption by member nations, including the U.S., beginning
January 1, 2013. The Basel III Accords are intended to strengthen the prudential standards for large and
internationally active banks; however, they may impact how the U.S. regulators implement the Dodd-Frank Act

for other banking institutions, including the possibility of higher capital and liquidity requirements. The full
impact of the Basel III Accords on the regulatory requirements to which we will be subject is currently unclear,
and will remain unknown for at least some time until implementing capital regulations are proposed and adopted.
It is currently anticipated that U.S. banking regulators will propose regulations to implement the Basel III
Accords in the first quarter of 2012. We will continue to monitor the ongoing rule-making process to assess both
the timing and the impact of the Dodd-Frank Act and Basel III Accords on our business.

For additional regulatory information on our brokerage and banking regulations, see Note 19—Regulatory

Requirements of Item 8. Financial Statements and Supplementary Data beginning on page 154.

AVAILABLE INFORMATION

We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports, available free of charge at our website as soon as reasonably practicable after
they have been filed with the SEC. Our website address is www.etrade.com.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at
100 F Street, NE, Washington, DC 20549. The public may obtain information of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains the materials we file with the
SEC at www.sec.gov.

ITEM 1A. RISK FACTORS

The following factors which could materially affect our business, financial condition and results of
operations should be carefully considered in addition to the other information set forth in this report. Although
the risks described below are those that management believes are the most significant, these are not the only risks
facing our company. Additional risks and uncertainties not currently known to us or that we currently do not
deem to be material may also materially affect our business, financial condition and results of operations.

Risks Relating to the Nature and Operation of Our Business

We have incurred significant losses in recent years and cannot assure that we will be profitable in the future.

We incurred net losses of $28.5 million and $1.3 billion for the years ended December 31, 2010 and 2009,
respectively. These losses were due primarily to the credit losses in our loan portfolio and, in 2009, the loss on
the Debt Exchange in which $1.7 billion aggregate principal amount of interest-bearing debt was exchanged for
an equal principal amount of non-interest-bearing convertible debentures. Although we have taken a significant
number of steps to reduce our credit exposure and reported net income of $156.7 million for the year ended
December 31, 2011, we likely will continue to suffer credit losses in 2012. In late 2007, we experienced a
substantial diminution of customer assets and accounts as a result of customer concerns regarding our credit
related exposures. While we were able to stabilize our retail franchise during the ensuing period, it could take
additional time to fully mitigate the credit issues in our loan portfolio, which could result in a return to a net loss
position.

We will continue to experience losses in our mortgage loan portfolio.

At December 31, 2011, the principal balance of our home equity loan portfolio was $5.3 billion and the
allowance for loan losses for this portfolio was $463.3 million. At December 31, 2011, the principal balance of
our one- to four-family loan portfolio was $6.6 billion and the allowance for loan losses for this portfolio was
$314.2 million. Although the provision for loan losses has improved in recent periods, performance is subject to
variability in any given quarter and we cannot state with certainty that the declining loan loss trend will continue.
In particular, a significant portion of our mortgage loan portfolio is secured by properties worth less than the
outstanding balance of loans secured by such properties. There can be no assurance that our allowance for loan
losses will be adequate if the residential real estate and credit markets deteriorate beyond our expectations. In
addition, as the OCC conducts its first cycle of examinations since succeeding to the OTS as our bank’s primary
federal banking supervisor, its views of our loan-related programs and practices that were designed in accordance
with guidance from the OTS may differ from the views previously taken by the OTS and may result in our
making changes to such programs and practices. We may be required under such circumstances to further
increase our allowance for loan losses, which could have an adverse effect on our regulatory capital position and
our results of operations in future periods.

The carrying value of our home equity and one- to four-family loan portfolios was $4.9 billion and $6.3
billion, respectively, at December 31, 2011. Our home equity and one- to four-family loan portfolios are held on
the consolidated balance sheet at carrying value because they are classified as held for investment, which
indicates that we have the intent and ability to hold them for the foreseeable future or until maturity. The fair
value of our home equity and one- to four-family loan portfolios was estimated to be $4.3 billion and $5.7
billion, respectively, at December 31, 2011,
in accordance with the fair value measurements accounting
guidance, as disclosed in Note 4—Fair Value Disclosures of Item 8. Financial Statements and Supplementary
Data on page 113. The fair value of our home equity and one- to four-family loan portfolios was estimated using
a modeling technique that discounted future cash flows based on estimated principal and interest payments over
the life of the loans, including expected losses and prepayments. There was limited or no observable market data
for our home equity and one- to four-family loan portfolios. Given the limited market data, the fair value
measurements cannot be determined with precision and the amount that would be realized in a forced liquidation,

an actual sale or immediate settlement could be significantly lower than both the carrying value and the estimated
fair value of the portfolio. In addition, changes in the underlying assumptions used, including discount rates and
estimates of future cash flows, could significantly affect the results of current or future fair value estimates.

Certain characteristics of our mortgage loan portfolio indicate an increased risk of loss. For example, at

December 31, 2011:

•

approximately 50% and 60% of the one- to four-family and home equity loan portfolios, respectively,
had a current LTV/CLTV of greater than 100%;

approximately 57% and 49% of the one- to four-family and home equity loan portfolios, respectively,
were originated with low or no documentation;

borrowers with current FICO scores less than 700 consisted of approximately 37% and 38% of the one-
to four-family and home equity loan portfolios, respectively; and

approximately 82% and 88% of the one- to four-family and home equity loan portfolios, respectively,
were purchased from a third party.

The foregoing factors are among the key items we track to predict and monitor credit risk in our mortgage
portfolio, together with loan type, housing prices, loan vintage and geographic location of the underlying
property. We believe the relative importance of these factors varies, depending upon economic conditions.

Home equity loans have certain characteristics that result in higher risk than first lien, amortizing one- to four-
family loans.

Approximately 85% of the home equity loan portfolio consists of second lien loans on residential real estate
properties. The average estimated current CLTV on our home equity loan portfolio was 112% as of December
31, 2011. We hold both the first and second lien positions in less than 1% of the home equity loan portfolio,
exposing us to risk associated with the actions and inactions of the first lien lender. We do not directly service
any of our loans and as a result, we rely on third party vendors and servicers to provide information on our loan
portfolio. We monitor our borrowers by refreshing FICO scores and CLTV information on a quarterly basis. We
do not receive complete data on the first lien positions of second lien home equity loans. In addition, we rely on
third party servicers to provide payment information on home equity loans, including which borrowers are
paying only the minimum amount due. We have incomplete information regarding the number of borrowers
paying only the minimum amounts, which impacts our ability to accurately report on whether borrowers are
repaying any principal during the draw period across the aggregate portfolio.

Home equity lines of credit convert to amortizing loans at the end of the draw period, which ranges from 60
months to 120 months. At December 31, 2011, the vast majority of the home equity line of credit portfolio had
not converted from the interest-only draw period to an amortizing loan. In addition, approximately 79% of the
home equity line of credit portfolio will not begin amortizing until after 2014. As a result, we do not yet have
sufficient data relating to loan default and delinquency of amortizing home equity lines of credit to determine if
the performance is different than the trends observed for home equity lines of credit in an interest-only draw
period.

We could experience significant losses on other securities held on the balance sheet.

At December 31, 2011, we held $422.6 million in amortized cost of non-agency collateralized mortgage
obligations (“CMO”) on our consolidated balance sheet. We incurred net impairment charges of $14.9 million
during 2011, which was a result of the deterioration in the expected credit performance of the underlying loans in
the securities. If the credit quality of these securities further deteriorates, we may incur additional impairment
charges which would have an adverse effect on our regulatory capital position and our results of operations in
future periods.

Loss of customers and assets could destabilize the Company or result in lower revenues in future periods.

During November 2007, well-publicized concerns about E*TRADE Bank’s holdings of asset-backed
securities led to widespread concerns about our continued viability. From the beginning of this crisis through
December 31, 2007, when the situation stabilized, customers withdrew approximately $5.6 billion of net cash and
approximately $12.2 billion of net assets from our bank and brokerage businesses. Many of the accounts that
were closed belonged to sophisticated and active customers with large cash and securities balances. While we
were able to stabilize our retail franchise, concerns about our viability may recur, which could lead to
destabilization and asset and customer attrition. If such destabilization should occur, there can be no assurance
that we will be able to successfully rebuild our franchise by reclaiming customers and growing assets. If we are
unable to sustain or, if necessary, rebuild our franchise, in future periods our revenues will be lower and our
losses will be greater than we have experienced.

We have a large amount of debt.

We have issued a substantial amount of high-yield debt, with restrictive financial and other covenants and
our expected annual interest cash outlay is approximately $165 million. Our ratio of debt (our corporate debt) to
equity (expressed as a percentage) was 30% at December 31, 2011. The degree to which we are leveraged could
have important consequences, including: 1) a substantial portion of our cash flow from operations is dedicated to
the payment of principal and interest on our indebtedness, thereby reducing the funds available for other
purposes; 2) our ability to obtain additional financing for working capital, capital expenditures, acquisitions and
other corporate needs is significantly limited; and 3) our substantial leverage may place us at a competitive
disadvantage, hinder our ability to adjust rapidly to changing market conditions and make us more vulnerable in
the event of a further downturn in general economic conditions or our business. In addition, a significant
reduction in revenues could have a material adverse effect on our ability to meet our debt obligations.

In June 2011, we granted a security interest to the holders of the 2017 Notes and the 2019 Notes pursuant to
the terms of the applicable indentures. Under the applicable indentures, the security interest is limited to $300
million of property and assets owned by certain unregulated subsidiaries. The security interest granted was
secured by collateral significantly less in value than $300 million. Also in June 2011, certain of our subsidiaries
issued guarantees on each outstanding series of senior notes and 2019 Notes. E*TRADE Bank and E*TRADE
Securities LLC, among others, did not issue such guarantees.

We conduct all of our operations through subsidiaries and have no revenue sources other than dividends from
our subsidiaries, which are subject to advance regulatory approval in the case of our most significant
subsidiaries.

We depend on dividends, distributions and other payments from our subsidiaries to fund payments on our
obligations, including our debt obligations. Regulatory and other legal restrictions limit our ability to transfer
funds to or from our subsidiaries. In addition, many of our subsidiaries are subject to laws and regulations that
authorize regulatory bodies to block or reduce the flow of funds to us, or that prohibit such transfers altogether in
certain circumstances. These laws and regulations may hinder our ability to access funds that we may need to
make payments on our obligations, including our debt obligations. The majority of our capital is invested in our
banking subsidiary E*TRADE Bank, which may not pay dividends to us without approval from the OCC and the
Federal Reserve. Our primary brokerage subsidiaries, E*TRADE Securities LLC and E*TRADE Clearing LLC,
are both subsidiaries of E*TRADE Bank; therefore, the OCC, together with the Federal Reserve, controls our
ability to receive dividend payments from our brokerage business as well. Furthermore, even if we receive the
approval of the OCC and the Federal Reserve to receive dividend payments from our brokerage business, in the
event of our bankruptcy or liquidation or E*TRADE Bank’s receivership, we would not be entitled to receive any
cash or other property or assets from our subsidiaries (including E*TRADE Bank, E*TRADE Clearing LLC and
E*TRADE Securities LLC) until those subsidiaries pay in full their respective creditors, including customers of
those subsidiaries and, as applicable, the FDIC and the Securities Investor Protection Corporation.

From late 2009 through mid-2011, we requested and received the approval of the OTS, our then primary
bank regulator to permit E*TRADE Bank to pay quarterly dividends to the Company. The dividends approved by
the OTS had been equal to the profits from the previous quarter of E*TRADE Securities LLC. We believe our
former regulator, the OTS, viewed these dividend requests as distinct from a more comprehensive request to
release a portion of E*TRADE Bank’s excess capital. During the third quarter of 2011, we transitioned regulators
from the OTS to the OCC and the Federal Reserve. We believe our new regulators would subject all dividend
requests to an equal level of scrutiny; therefore rather than request a dividend from E*TRADE Bank in an
amount equal to the profits of E*TRADE Securities LLC in the prior quarter, we believe the best path for our
shareholders is to work on a comprehensive dividend plan that efficiently distributes capital among our regulated
entities and parent company. We are in dialogue with our regulators regarding our ability to implement a
comprehensive dividend plan and we expect to complete that dialogue by the end of 2012. Following the
completion of that dialogue, we expect to have a better understanding of the timing of any future dividends;
however, we cannot predict the likelihood or the timing of regulatory approval for any such dividends.

We are subject to investigations and lawsuits as a result of our losses from mortgage loans and asset-backed
securities.

In 2007, we recognized an increased provision expense totaling $640 million and asset

losses and
impairments of $2.45 billion, including the sale of our asset-backed securities portfolio to Citadel. As a result,
various plaintiffs filed class actions and derivative lawsuits, which were subsequently consolidated into one class
action and one derivative lawsuit, alleging disclosure violations regarding our home equity, mortgage and
securities portfolios during 2007. In addition, the SEC initiated an informal inquiry into matters related to our
loan and securities portfolios. While we have entered into a memorandum of understanding to settle the
consolidated class action lawsuit, the settlement is subject to Court approval and has not yet been finalized. The
continued defense of these matters and the finalization of the terms of the settlement with the plaintiffs in the
consolidated class action have entailed and will continue to entail considerable cost and may be time consuming
for our management. Unfavorable outcomes in any of these matters, including the consolidated class action if the
settlement is not finalized on the terms anticipated or does not obtain the requisite approval of the Court, could
have a material adverse effect on our business, financial condition, results of operations and cash flows.

Many of our competitors have greater financial, technical, marketing and other resources.

The financial services industry is highly competitive, with multiple industry participants competing for the
same customers. Many of our competitors have longer operating histories and greater resources than we have and
offer a wider range of financial products and services. Other of our competitors offer a more narrow range of
financial products and services and have not been as susceptible to the disruptions in the credit markets that have
impacted our Company, and therefore have not suffered the losses we have. The impact of competitors with
superior name recognition, greater market acceptance, larger customer bases or stronger capital positions could
adversely affect our revenue growth and customer retention. Our competitors may also be able to respond more
quickly to new or changing opportunities and demands and withstand changing market conditions better than we
can. Competitors may conduct extensive promotional activities, offering better terms, lower prices and/or
different products and services or combination of products and services that could attract current E*TRADE
customers and potentially result in price wars within the industry. Some of our competitors may also benefit from
established relationships among themselves or with third parties enhancing their products and services.

Turmoil in the global financial markets could reduce trade volumes and margin borrowing and increase our
dependence on our more active customers who receive lower pricing.

Online investing services to the retail customer, including trading and margin lending, account for a
significant portion of our revenues. Turmoil in the global financial markets could lead to changes in volume and
price levels of securities and futures transactions which may, in turn, result in lower trading volumes and margin
lending. In particular, a decrease in trading activity within our lower activity accounts could impact revenues and

increase dependence on more active trading customers who receive more favorable pricing based on their trade
volume. A decrease in trading activity or securities prices would also typically be expected to result in a decrease
in margin borrowing, which would reduce the revenue that we generate from interest charged on margin
borrowing.

We rely heavily on technology, and technology can be subject to interruption and instability.

We rely on technology, particularly the Internet, to conduct much of our activity. Our technology operations
are vulnerable to disruptions from human error, natural disasters, power loss, computer viruses, spam attacks,
unauthorized access and other similar events. Disruptions to or instability of our technology or external
technology that allows our customers to use our products and services could harm our business and our
reputation. In addition, technology systems, whether they be our own proprietary systems or the systems of third
parties on whom we rely to conduct portions of our operations, are potentially vulnerable to security breaches
and unauthorized usage. An actual or perceived breach of the security of our technology could harm our business
and our reputation.

Vulnerability of our customers’ computers and mobile devices could lead to significant losses related to identity
theft or other fraud and harm our reputation and financial performance.

Because our business model relies heavily on our customers’ use of their own personal computers, mobile
devices and the Internet, our business and reputation could be harmed by security breaches of our customers and
third parties. Computer viruses and other attacks on our customers’ personal computer systems and mobile
devices could create losses for our customers even without any breach in the security of our systems, and could
thereby harm our business and our reputation. As part of our E*TRADE Complete Protection Guarantee, we
reimburse our customers for losses caused by a breach of security of the customers’ own personal systems. Such
reimbursements could have a material impact on our financial performance.

We rely on third party service providers to perform certain functions.

We rely on third party service providers for certain technology, processing, servicing and support functions.
These third party service providers are also subject to operational and technology vulnerabilities, which may
impact our business. An interruption in or the cessation of service by any third party service provider and our
inability to make alternative arrangements in a timely manner could have a material impact on our business and
financial performance.

Downturns in the securities markets increase the credit risk associated with margin lending or securities loaned
transactions.

We permit certain customers to purchase securities on margin. A downturn in securities markets may impact
the value of collateral held in connection with margin receivables and may reduce its value below the amount
borrowed, potentially creating collections issues with our margin receivables. In addition, we frequently borrow
securities from and lend securities to other broker-dealers. Under regulatory guidelines, when we borrow or lend
securities, we must simultaneously disburse or receive cash deposits. A sharp change in security market values
may result in losses if counterparties to the borrowing and lending transactions fail to honor their commitments.

We may be unsuccessful in managing the effects of changes in interest rates and the enterprise interest-earning
assets in our portfolio.

Net operating interest income is an important source of our revenue. Our results of operations depend, in
part, on our level of net operating interest income and our effective management of the impact of changing
interest rates and varying asset and liability maturities. Our ability to manage interest rate risk could impact our
financial condition. We use derivatives to help manage interest rate risk. However, the derivatives we utilize may
not be completely effective at managing this risk and changes in market interest rates and the yield curve could

reduce the value of our financial assets and reduce net operating interest income. The lower interest rate
environment in recent years has compressed our net interest spread, and given the continued challenges of the
current interest rate environment, our net interest spread could average less than 2.50% for the year ending
December 31, 2012. Among other items, we periodically enter into repurchase agreements to support the funding
and liquidity requirements of E*TRADE Bank. If we are unsuccessful in maintaining our relationships with
counterparties, we could recognize substantial
losses on the derivatives we utilized to hedge repurchase
agreements.

If we do not successfully manage consolidation opportunities, we could be at a competitive disadvantage.

There has recently been significant consolidation in the financial services industry and this consolidation is
likely to continue in the future. Should we be excluded from or fail to take advantage of viable consolidation
opportunities, our competitors may be able to capitalize on those opportunities and create greater scale and cost
efficiencies to our detriment.

Although we are currently constrained by the terms of our corporate debt and the memoranda of
understanding we and E*TRADE Bank entered into with our primary banking regulators, we may seek to acquire
businesses in the future. The assets of these businesses are primarily customer accounts. Our retention of
customers’ assets may be impacted by our ability to successfully continue to integrate the acquired operations,
products (including pricing) and personnel. Diversion of management attention from other business concerns
could have a negative impact. If we are not successful in our integration efforts, we may experience significant
attrition in the acquired accounts or experience other issues that would prevent us from achieving the level of
revenue enhancements and cost savings that we expect with respect to an acquisition.

Risks associated with principal trading transactions could result in trading losses.

A majority of our market making revenues are derived from trading as a principal. We may incur trading
losses relating to the purchase, sale or short sale of securities. We carry equity security positions on a daily basis
and from time to time, we may carry large positions in securities of a single issuer or issuers engaged in a
specific industry. Sudden changes in the value of these positions could impact our financial results.

Reduced spreads in securities pricing, levels of trading activity and trading through market makers could harm
our market maker business.

Technological advances, competition and regulatory changes in the marketplace may continue to tighten
securities spreads. Tighter spreads could reduce revenue capture per share by our market maker, thus reducing
revenues for this line of business.

Advisory services subject us to additional risks.

We provide advisory services to investors to aid them in their decision making. Investment decisions and
suggestions are based on publicly available documents and communications with investors regarding investment
preferences and risk tolerances. Publicly available documents may be inaccurate and misleading, resulting in
recommendations or transactions that are inconsistent with the investors’ intended results. In addition, advisors
may not understand investor needs or risk tolerances, failures that may result in the recommendation or purchase
of a portfolio of assets that may not be suitable for the investor. To the extent that we fail to know our customers
or improperly advise them, we could be found liable for losses suffered by such customers, which could harm our
reputation and business.

We have a significant deferred tax asset and cannot assure it will be fully realized.

We had net deferred tax assets of $1.6 billion as of December 31, 2011. We did not establish a valuation
allowance against our federal net deferred tax assets as of December 31, 2011 as we believe that it is more likely

than not that all of these assets will be realized. In evaluating the need for a valuation allowance, we estimated
future taxable income based on management approved forecasts. This process required significant judgment by
management about matters that are by nature uncertain. If future events differ significantly from our current
forecasts, a valuation allowance may need to be established, which could have a material adverse effect on our
results of operations and our financial condition.

As a result of the Public Equity Offering, the Debt Exchange and related transactions in 2009, we believe that we
experienced an “ownership change” for tax purposes that could cause us to permanently lose a significant
portion of our U.S. federal and state deferred tax assets.

As a result of the Public Equity Offering, the Debt Exchange and related transactions in 2009, we believe
that we experienced an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986,
as amended (“Section 382”)(which is generally a greater than 50 percentage point increase by certain “5%
shareholders” over a rolling three year period). Section 382 imposes an annual limitation on the utilization of
deferred tax assets, such as net operating loss carry forwards and other tax attributes, once an ownership change
has occurred. Depending on the size of the annual limitation (which is in part a function of our market
capitalization at the time of the ownership change) and the remaining carry forward period of the tax assets (U.S.
federal net operating losses generally may be carried forward for a period of 20 years), we could realize a
permanent loss of a portion of our U.S. federal and state deferred tax assets and certain built-in losses that have
not been recognized for tax purposes. We believe the tax ownership change will extend the period of time it will
take to fully utilize our pre-ownership change net operating losses (“NOLs”), but will not limit the total amount
of pre-ownership change NOLs we can utilize. This is a complex analysis and requires the Company to make
certain judgments in determining the annual limitation. As a result, it is possible that we could ultimately lose a
significant portion of our deferred tax assets, which could have a material adverse effect on our results of
operations and financial condition.

Risks Relating to the Regulation of Our Business

We are subject to extensive government regulation, including banking and securities rules and regulations,
which could restrict our business practices.

The securities and banking industries are subject

to extensive regulation. All of our broker-dealer
subsidiaries have to comply with many laws and rules, including rules relating to sales practices and the
suitability of recommendations to customers, possession and control of customer funds and securities, margin
lending, execution and settlement of transactions and anti-money laundering. We are also subject to additional
laws and rules as a result of our market maker operations.

Similarly, E*TRADE Financial Corporation and ETB Holdings, Inc., as savings and loan holding
companies, and E*TRADE Bank, E*TRADE Savings Bank and E*TRADE United Bank, as federally chartered
savings banks, are subject to extensive regulation, supervision and examination by the OCC and the Federal
Reserve (including pursuant
to the terms of the memoranda of understanding that E*TRADE Financial
Corporation, E*TRADE Bank, E*TRADE Savings Bank and E*TRADE United Bank entered into with our
former primary banking regulator) and, in the case of the savings banks, also the FDIC. Such regulation covers
all banking business,
including lending practices, safeguarding deposits, capital structure, recordkeeping,
transactions with affiliates and conduct and qualifications of personnel.

Recently enacted regulatory reform legislation may have a material impact on our operations. In addition, if we
are unable to meet these new requirements, we could face negative regulatory consequences, which would have a
material negative effect on our business.

On July 21, 2010, the President signed into law the Dodd-Frank Act. This law contains various provisions
designed to enhance financial stability and to reduce the likelihood of another financial crisis and significantly

changed the bank regulatory structure for our Company and its thrift subsidiaries. Portions of the Dodd-Frank
Act were effective immediately, but many provisions will only be effective after the adoption of implementing
regulations, which have been delayed in numerous cases. The key effects of the Dodd-Frank Act, when fully
implemented, on our business are:

•

changes to the thrift supervisory structure;

changes to regulatory capital requirements;

changes to the assessment base used by depository institutions to calculate their FDIC insurance
premiums, increases in the minimum reserve ratio for the FDIC’s deposit insurance fund to 1.35%, and
imposition of the additional costs of this increase on depository institutions with assets of $10 billion or
more; and

establishment of the CFPB with broad authority to implement new consumer protection regulations
and, for banks and thrifts with $10 billion or more in assets, to examine and enforce compliance with
federal consumer laws.

Under the legislation, the OTS was abolished in July 2011 and its functions and personnel were distributed
among the OCC, the FDIC and the Federal Reserve. Primary jurisdiction for the supervision and regulation of
savings and loan holding companies, including the Company, was transferred to the Federal Reserve; supervision
and regulation of federal savings associations, such as the Company’s three thrift subsidiaries, was transferred to
the OCC. Although the Dodd-Frank Act maintains the federal thrift charter, it eliminates certain preemption,
branching and other benefits of the charter and imposes new penalties for failure to comply with the qualified
thrift lender test. The Dodd-Frank Act also requires all companies, including savings and loan holding companies
that directly or indirectly control an insured depository institution, to serve as a source of strength for the
institution, including committing necessary capital and liquidity support.

We are required to file periodic reports with the Federal Reserve and are subject to examination and
supervision by them. The Federal Reserve also has certain types of enforcement powers over us, ETB Holdings,
Inc., and our non-depository institution subsidiaries, including the ability to issue cease-and-desist orders, force
divestiture of our thrift subsidiaries and impose civil and monetary penalties for violations of federal banking
laws and regulations or for unsafe or unsound banking practices. Our thrift subsidiaries are subject to similar
reporting, examination, supervision and enforcement oversight by the OCC. In concurrence with the transfer of
parent company supervisory authority from the OTS to the Federal Reserve, the Federal Reserve has issued
guidance aligning the supervisory and regulatory standards of savings and loan holding companies more closely
with the standards applicable to bank holding companies. The Federal Reserve had also indicated that its
supervision of savings and loan holding companies may entail a more rigorous level of review than previously
applied by the OTS.

The Dodd-Frank Act also creates a new independent regulatory body, the CFPB, which has been given
broad rulemaking authority to implement the consumer protection laws that apply to banks and thrifts and to
prohibit “unfair, deceptive or abusive” acts and practices. For all banks and thrifts with total consolidated assets
over $10 billion, including E*TRADE Bank, the CFPB has exclusive rulemaking and examination, and primary
enforcement authority, under federal consumer financial laws and regulations. In addition, the Dodd-Frank Act
permits states to adopt consumer protection laws and regulations that are stricter than those regulations
promulgated by the CFPB.

For us, one of the most significant changes under the new law is that savings and loan holding companies
such as our Company for the first time will become subject to the same capital and activity requirements as those
applicable to bank holding companies. In addition, we will be subject to the same capital requirements as those
applied to banks, which requirements exclude, on a phase-out basis, all trust preferred securities from Tier I
capital. The Dodd-Frank Act provides for a five year phase-in period for these new capital requirements. We
fully expect to meet the capital requirements applicable to thrift holding companies as they are phased in.

However, it is possible that our regulators may impose more stringent capital and other prudential standards on
us prior to the end of the five year phase-in period. For example, both the Federal Reserve and the OCC have
proposed rules that would ultimately require the parent company and E*TRADE Bank, respectively, to conduct
capital adequacy stress tests on their operations.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations,
the details, substance, and impact of which may not be known for months or years. It is difficult to predict at this
time what specific impacts the Dodd-Frank Act and the yet-to-be-written rules and regulations may have on us.
However, given that the legislation is likely to materially change the regulatory environment for the financial
services industry in which we operate, we expect at a minimum that our compliance costs will increase.

If we fail to comply with applicable securities and banking laws, rules and regulations, either domestically or
internationally, we could be subject to disciplinary actions, damages, penalties or restrictions that could
significantly harm our business.

The SEC, FINRA and other self-regulatory organizations and state securities commissions, among other
things, can censure, fine, issue cease-and-desist orders or suspend or expel a broker-dealer or any of its officers
or employees. The OCC and Federal Reserve may take similar action with respect to our banking and other
financial activities, respectively. Similarly, the attorneys general of each state could bring legal action on behalf
of the citizens of the various states to ensure compliance with local laws. Regulatory agencies in countries
outside of the U.S. have similar authority. The ability to comply with applicable laws and rules is dependent in
part on the establishment and maintenance of a reasonable compliance system. The failure to establish and
enforce reasonable compliance procedures, even if unintentional, could subject us to significant losses or
disciplinary or other actions.

If we do not maintain the capital levels required by regulators, we may be fined or even forced out of business.

The SEC, FINRA, the OCC, the Federal Reserve and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of regulatory capital by banks and net capital by securities
broker-dealers. E*TRADE Bank is subject to various regulatory capital requirements administered by the OCC,
and E*TRADE Financial Corporation will, for the first time, become subject to specific capital requirements
administered by the Federal Reserve. Failure to meet minimum capital requirements can trigger certain
mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could harm E*TRADE
Bank’s and E*TRADE Financial Corporation’s operations and financial statements.

E*TRADE Bank must meet specific capital guidelines that involve quantitative measures of E*TRADE
Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.
Quantitative measures established by regulation to ensure capital adequacy require E*TRADE Bank to maintain
minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to adjusted
total assets. To satisfy the capital requirements for a “well capitalized” financial institution, E*TRADE Bank
must maintain higher total and Tier I capital to risk-weighted assets and Tier I capital to adjusted total assets
ratios. E*TRADE Bank’s capital amounts and classification are subject to qualitative judgments by the regulators
about the strength of components of its capital, risk weightings of assets, off-balance sheet transactions and other
factors. Any significant reduction in E*TRADE Bank’s regulatory capital could result in E*TRADE Bank being
less than “well capitalized” or “adequately capitalized” under applicable capital rules. A failure of E*TRADE
Bank to be “adequately capitalized” which is not cured within time periods specified in the indentures governing
our debt securities would constitute a default under our debt securities and likely result in the debt securities
becoming immediately due and payable at their full face value.

The regulators may request we raise equity to increase the regulatory capital of E*TRADE Bank or to
further reduce debt. If we were unable to raise equity, we could face negative regulatory consequences, such as
restrictions on our activities, requirements that we divest ourselves of certain businesses and requirements that
we dispose of certain assets and liabilities within a prescribed period. Any such actions could have a material
negative effect on our business.

Similarly, failure to maintain the required net capital by our securities broker-dealers could result in
suspension or revocation of registration by the SEC and suspension or expulsion by FINRA, and could ultimately
lead to the firm’s liquidation. If such net capital rules are changed or expanded, or if there is an unusually large
charge against net capital, operations that require an intensive use of capital could be limited. Such operations
may include investing activities, marketing and the financing of customer account balances. Also, our ability to
withdraw capital from brokerage subsidiaries could be restricted.

As a non-grandfathered savings and loan holding company, we are subject to activity limitations and
requirements that could restrict our ability to engage in certain activities and take advantage of business
opportunities.

Under the Gramm-Leach-Bliley Act of 1999, our activities are restricted to those that are financial in nature
and certain real estate-related activities. We believe all of our existing activities and investments are permissible
under the Gramm-Leach-Bliley Act of 1999. At the same time, we are unable to pursue future activities that are
not financial in nature or otherwise real-estate related. We are also limited in our ability to invest in other savings
and loan holding companies. The Dodd-Frank Act also requires savings and loan holding companies like ours, as
well as all of our thrift subsidiaries, to be both “well capitalized” and “well managed” in order for us to conduct
certain financial activities, such as market making and securities underwriting. We believe that we will be able to
continue to engage in all of our current financial activities. However, if we and our thrift subsidiaries are unable
to satisfy the above “well capitalized” and “well managed” requirements, we could be subject to activity
restrictions that could prevent us from engaging in market making and securities underwriting, as well as other
negative regulatory actions.

to extensive regulation of

In addition, E*TRADE Bank is subject

its activities and investments,
capitalization, community reinvestment, risk management policies and procedures and relationships with
affiliated companies. Acquisitions of and mergers with other financial institutions, purchases of deposits and loan
portfolios, the establishment of new depository institution subsidiaries and the commencement of new activities
by bank subsidiaries require the prior approval of the OCC and the Federal Reserve, and in some cases the FDIC,
which may deny approval or limit the scope of our planned activity. Our compliance with these regulations and
conditions could place us at a competitive disadvantage in an environment in which consolidation within the
financial services industry is prevalent. Also, these regulations and conditions could affect our ability to realize
synergies from future acquisitions, could negatively affect us following an acquisition and could also delay or
prevent the development, introduction and marketing of new products and services. In addition, E*TRADE
Clearing LLC and E*TRADE Securities LLC, as operating subsidiaries of E*TRADE Bank, are subject to
increased regulatory oversight and the same activity restrictions that are applicable to E*TRADE Bank.

Risks Relating to Owning Our Stock

We are substantially restricted by the terms of our corporate debt.

The indentures governing our corporate debt contain various covenants and restrictions that limit our ability

and certain of our subsidiaries’ ability to, among other things:

•

incur additional indebtedness;

create liens;

pay dividends or make other distributions;

repurchase or redeem capital stock;

• make investments or other restricted payments;

•

enter into transactions with our shareholders or affiliates;

•

sell assets or shares of capital stock of our subsidiaries;

receive dividend or other payments from our subsidiaries; and

• merge, consolidate or transfer substantially all of our assets.

As a result of the covenants and restrictions contained in the indentures, we are limited in how we conduct
our business and we may be unable to raise additional debt or equity financing to compete effectively or to take
advantage of new business opportunities. Each of these series of our corporate debt contains a limitation, subject
to important exceptions, on our ability to incur additional debt if our Consolidated Fixed Charge Coverage Ratio
(as defined in the relevant indentures) is less than or equal to 2.5 to 1.0. As of December 31, 2011, our
Consolidated Fixed Charge Coverage Ratio was 1.6 to 1.0. The terms of any future indebtedness could include
more restrictive covenants.

Although these covenants provide substantial flexibility, for example the ability to incur “refinancing
indebtedness” and to incur up to $300 million of secured debt under a credit facility, the covenants, among other
things, generally limit our ability to incur additional debt even if we were to substantially reduce our existing
debt through debt exchange transactions. We could be forced to repay immediately all our outstanding debt
securities at their full principal amount if we were to breach these covenants and did not cure the breach within
the cure periods (if any) specified in the respective indentures. Further, if we experience a change of control, as
defined in the indentures, we could be required to offer to purchase our debt securities at 101% of their principal
amount. Under our debt securities a “change of control” would occur if, among other things, a person became the
beneficial owner of more than 50% of the total voting power of our voting stock which, with respect to the 2015
Notes and 2016 Notes, would need to be coupled with a ratings downgrade before we would be required to offer
to purchase those securities.

We cannot assure that we will be able to remain in compliance with these covenants in the future and, if we

fail to do so, that we will be able to obtain waivers from the appropriate parties and/or amend the covenants.

The value of our common stock may be diluted if we need additional funds in the future or engage in
debt-for-equity exchanges in the future.

In the future, we may need to raise additional funds via debt and/or equity instruments, which may not be
available on favorable terms, if available at all. If adequate funds are not available on acceptable terms, we may
be unable to fund our capital needs and our plans for the growth of our business. In addition, if funds are
available, the issuance of equity securities could significantly dilute the value of our shares of our common stock
and cause the market price of our common stock to fall. We have the ability to issue a significant number of
shares of stock in future transactions, which would substantially dilute existing shareholders, without seeking
further shareholder approval.

In recent periods, the global financial markets were in turmoil and the equity and credit markets experienced
extreme volatility, which caused already weak economic conditions to worsen. Continued turmoil in the global
financial markets could further restrict our access to the equity and debt markets.

The market price of our common stock may continue to be volatile.

From January 1, 2009 through December 31, 2011, the price per share of our common stock ranged from a
low of $5.90 to a high of $29.00. The market price of our common stock has been, and is likely to continue to be,
highly volatile and subject to wide fluctuations. In the past, volatility in the market price of a company’s
securities has often led to securities class action litigation. Such litigation could result in substantial costs to us
and divert our attention and resources, which could harm our business. As discussed in Note 21—Commitments,
Contingencies and Other Regulatory Matters of Item 8. Financial Statements and Supplementary Data, we are
currently a party to litigation related to the decline in the market price of our stock, and such

litigation could occur again in the future. Declines in the market price of our common stock or failure of the
market price to increase could also harm our ability to retain key employees, reduce our access to capital, impact
our ability to utilize deferred tax assets in the event of another ownership change and otherwise harm our
business.

We have various mechanisms in place that may discourage takeover attempts.

Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a third
party from acquiring control of us in a merger, acquisition or similar transaction that a shareholder may consider
favorable. Such provisions include:

•

authorization for the issuance of “blank check” preferred stock;

the prohibition of cumulative voting in the election of directors;

a super-majority voting requirement to effect business combinations and certain amendments to our
certificate of incorporation and bylaws;

limits on the persons who may call special meetings of shareholders;

the prohibition of shareholder action by written consent; and

advance notice requirements for nominations to the Board or for proposing matters that can be acted on
by shareholders at shareholder meetings.

In addition, certain provisions of our stock incentive plans, management retention and employment
agreements (including severance payments and stock option acceleration), certain provisions of Delaware law
and the requirements under our debt securities to offer to purchase such securities at 101% of their principal
amount may also discourage, delay or prevent someone from acquiring or merging with us.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other
actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial
condition, operating performance, and our ability to receive dividend payments from our subsidiaries which is
subject to prevailing economic and competitive conditions and to certain financial, business and other factors
beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to
permit us to pay the principal and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be
forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or
restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit
us to meet our scheduled debt service obligations. In addition, the terms of existing or future debt instruments
may restrict us from adopting some of these alternatives.

Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our
financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us
to comply with more onerous covenants, which could further restrict our business operations. In addition, any
failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely
result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. If our
cash flows and available cash are insufficient to meet our debt service obligations, we could face substantial
liquidity problems and might be required to dispose of material assets or operations to meet our debt service and
other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could
realize from them, and these proceeds may not be adequate to meet any debt service obligations then due.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

A summary of our significant locations at December 31, 2011 is shown in the following table. All facilities
are leased, except for 165,000 square feet of our office in Alpharetta, Georgia. Square footage amounts are net of
space that has been sublet or part of a facility restructuring.

Location

Alpharetta, Georgia
Arlington, Virginia
Jersey City, New Jersey
Menlo Park, California
Sandy, Utah
New York, New York
Chicago, Illinois

Approximate Square Footage

260,000
119,000
107,000
91,000
66,000
39,000
25,000

All of our facilities are used by either our trading and investing or balance sheet management segments, in
addition to the corporate/other category. All other leased facilities with space of less than 25,000 square feet are
not listed by location. In addition to the significant facilities above, we also lease all 28 E*TRADE branches,
ranging in space from approximately 2,500 to 7,000 square feet. We believe our facilities space is adequate to
meet our needs in 2012.

ITEM 3. LEGAL PROCEEDINGS

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 $1.3 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 filing of 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. By order dated November 4,
2008, 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. Oral argument on the appeal was heard on July 15, 2010.
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. E*TRADE 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. On September 20, 2011, the trial court granted limited
discovery at a conference on November 4, 2011, and set a motion schedule and trial date. The trial will continue
on May 14, 2012. The Company will continue to defend itself vigorously.

Chief Executive Officer and Chief Financial Officer, Mitchell H. Caplan and Robert J. Simmons, respectively, by
Larry Freudenberg on his own behalf and on behalf of others similarly situated (the “Freudenberg Action”). On
July 17, 2008, the trial court consolidated this action with four other purported class actions, all of which were
filed in the United States District Court for the Southern District of New York and which were based on the same
facts and circumstances. On January 16, 2009, plaintiffs served their consolidated amended class action
complaint in which they also named Dennis Webb, the Company’s former Capital Markets Division President, as
a defendant. Plaintiffs contend, among other things, that the value of the Company’s stock between April 19,
2006 and November 9, 2007 was artificially inflated because the defendants issued materially false and
misleading statements and failed to disclose that the Company was experiencing a rise in delinquency rates in its
mortgage and home equity portfolios; failed to timely record an impairment on its mortgage and home equity
portfolios; materially overvalued its securities portfolio, which included assets backed by mortgages; and based
on the foregoing, lacked a reasonable basis for the positive statements made about the Company’s earnings and
prospects. Plaintiffs seek to recover damages in an amount to be proven at trial, including interest and attorneys’
fees and costs. The parties entered into a Memorandum of Understanding (“MOU”) on December 17, 2011 to
settle these consolidated actions. Under the terms of the MOU, the Company and its insurance carriers will pay
$79 million in return for full releases. Approximately $10.8 million of the total settlement figure will be paid by
the Company, and was recorded in the other operating expense line item of the consolidated statement of income
(loss) for the year ended December 31, 2011. This settlement is subject to Court approval and it has not yet been
finalized. The defendants continue to deny that they committed any violations of law or breached any fiduciary
duty to shareholders.

On October 17, 2007, the SEC initiated an informal inquiry into matters related to the Company’s mortgage
loan and mortgage-related securities investment portfolios. The Company is cooperating fully with the SEC in
this matter.

On August 15, 2008, Ronald M. Tate as trustee of the Ronald M. Tate Trust Dtd 4/13/88, and George
Avakian filed an action in the United States District Court for the Southern District of New York against the
Company, Mitchell H. Caplan and Robert J. Simmons based on the same facts and circumstances, and containing
the same claims, as the Freudenberg consolidated actions discussed above. By agreement of the parties and
approval of the court, the Tate action was consolidated with the Freudenberg consolidated actions for the purpose
of pre-trial discovery. Plaintiffs seek to recover damages in an amount to be proven at trial, including interest,
attorneys’ and expert fees and costs. The plaintiffs in this action will be part of the anticipated settlement class
for the consolidated actions described above.

Based upon the same facts and circumstances alleged in the Freudenberg consolidated actions discussed
above, a verified shareholder derivative complaint was filed in the United States District Court for the Southern
District of New York on October 4, 2007 by Catherine Rubery, against the Company and its then Chief
Executive Officer, President/Chief Operating Officer, Chief Financial Officer and individual members of its
board of directors. The Rubery complaint was consolidated with another shareholder derivative complaint
brought by shareholder Marilyn Clark in the same court and against the same named defendants. On July 26,
2010, Plaintiffs served their consolidated amended complaint, in which they also named Dennis Webb, the
Company’s former Capital Markets Division President, as a defendant. Plaintiffs allege, among other things,
causes of action for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and violation of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks, among other
things, unspecified monetary damages in favor of the Company, changes to corporate governance procedures and
various forms of injunctive relief.

liquid and safe investments for short term investing. On December 18, 2008, plaintiffs filed their first amended
class action complaint. Defendants filed their pending motion to dismiss plaintiffs’ amended complaint on
February 5, 2009, and briefing on defendants’ motion to dismiss was completed on April 15, 2009. Plaintiffs seek
to recover damages in an amount to be proven at trial, or, in the alternative, rescission of auction rate securities
purchases, plus interest and attorney’s fees and costs. On March 18, 2010, the District Court dismissed the
complaint without prejudice. On April 22, 2010, Plaintiffs amended their complaint. The Company has moved to
dismiss the amended complaint. By an Order dated March 31, 2011, the Court granted E*TRADE’s motion and
dismissed the action with prejudice. On May 2, 2011, Plaintiffs filed a Notice of Appeal to the U.S. Court of
Appeals for the Second Circuit. Plaintiffs filed their brief on August 12, 2011. The Company’s response brief
was filed October 26, 2011. Plaintiffs’ reply brief was filed on November 21, 2011. Oral argument has not yet
been scheduled.

Beginning in approximately August 2008, representatives of various states attorneys general and FINRA
initiated inquiries regarding the purchase of auction rate securities by E*TRADE Securities LLC’s customers. On
February 9, 2011, E*TRADE Securities LLC received a “Wells Notice” from FINRA Staff stating that they have
made a preliminary determination to recommend that disciplinary action be brought against E*TRADE
Securities LLC for alleged violations of certain FINRA rules in connection with the purchases of auction rate
securities by customers of E*TRADE Securities LLC. E*TRADE Securities LLC is cooperating with these
inquiries and has submitted a Wells response to FINRA setting forth the bases for E*TRADE Securities’ belief
that disciplinary action is not warranted.

On January 19, 2010, the North Carolina Securities Division filed an administrative petition before the
North Carolina Secretary of State against E*TRADE Securities LLC seeking to revoke the North Carolina
securities dealer registration of E*TRADE Securities LLC or, alternatively, to suspend that registration until all
North Carolina residents are made whole for their investments in auction rate securities purchased through
E*TRADE Securities LLC. On March 8, 2011, E*TRADE Securities LLC, without admitting or denying the
underlying allegations, findings or conclusions, resolved the North Carolina administrative action by entering
into a consent order (“North Carolina Order”) pursuant to which E*TRADE Securities LLC agreed to pay a
$25,000 civil penalty and to reimburse the North Carolina Securities Division’s investigative costs of $400,000.
E*TRADE Securities LLC also agreed to various undertakings set forth in the North Carolina Order, including
additional internal training on fixed income products and the retention of an independent consultant to review
E*TRADE Securities LLC’s policies and procedures related to the approval and sale of fixed income products.
As of December 31, 2011, no existing North Carolina customers held any auction rate securities.

On February 3, 2010, a class action complaint was filed in the United States District Court for the Northern
District of California against E*TRADE Securities LLC by Joseph Roling on his own behalf and on behalf of all
others similarly situated. The lead plaintiff alleges that E*TRADE Securities LLC unlawfully charged and
collected certain account activity fees from its customers. Claimant, on behalf of himself and the putative class,
asserts breach of contract, unjust enrichment and violation of California Civil Code Section 1671 and seeks
equitable and injunctive relief for alleged illegal, unfair and fraudulent practices under California’s Unfair
Competition Law, California Business and Professional Code Section 17200 et seq. The plaintiff seeks, among
other things, certification of the class action on behalf of alleged similarly situated plaintiffs, unspecified
damages and restitution of amounts allegedly wrongfully collected by E*TRADE Securities LLC, attorneys’ fees
and expenses and injunctive relief. The Company moved to transfer venue on the case to the Southern District of
New York; that motion was denied. The Court granted E*TRADE’s motion to dismiss in part and denied the
motion to dismiss in part. The Court bifurcated discovery to permit initial discovery on individual claims and
class certification. Following preliminary discovery, Plaintiffs moved to amend their verified complaint for a
second time, to assert new allegations and to add a new plaintiff. The Company filed its opposition to this motion
on December 27, 2011. The Company intends to vigorously defend itself against the claims raised in this action.

securities through E*TRADE Securities LLC by Colorado residents. On October 19, 2011, E*TRADE Securities
LLC and the Colorado Division of Securities reached an agreement in principle to settle the Colorado proceeding
whereby E*TRADE Securities LLC will offer to purchase auction rate securities held by Colorado customers
who found themselves unable to sell their securities after those securities had been frozen in the broader auction
rate securities market. The agreement in principle also included an agreement with the North American Securities
Administrators Association (“NASAA”) whereby E*TRADE Securities LLC will offer to purchase auction rate
securities purchased through E*TRADE Securities LLC on a nationwide basis and pay a $5 million penalty to be
allocated among 48 states and the District of Columbia, Puerto Rico and the Virgin Islands but exclusive of
North Carolina and South Carolina with whom E*TRADE Securities previously had reached separate
settlements. Under the agreement in principle each state will receive its allocated share of the $5 million penalty
pursuant to administrative consent cease and desist orders to be entered into by each state. A Consent Order
memorializing the agreement in principle as it related to Colorado customers was entered by the Colorado
Securities Commissioner on November 16, 2011, and amended on November 23, 2011, whereby E*TRADE
Securities LLC, without admitting or denying the underlying allegations, agreed to pay an administrative penalty
to Colorado of $84,202, which amount constituted Colorado’s share of the total NASAA state settlement amount
of $5 million, and to reimburse the Colorado Division of Securities’ costs associated with the administrative
action in the amount of $596,580. Under the terms of the Consent Order, E*TRADE Securities LLC will offer to
purchase (or offer to arrange a third party to purchase), at par plus accrued and unpaid dividends and interest,
from eligible investors nationwide their auction rate securities purchased through E*TRADE Securities LLC, or
through an entity acquired by the Company on or before February 13, 2008, if such auction rate securities have
failed at auction at least once since February 13, 2008 (“the Purchase Offer”). E*TRADE Securities LLC also
agreed to identify eligible investors who purchased auction rate securities through E*TRADE Securities LLC on
or before February 13, 2008, and sold those securities below par between February 13, 2008, and November 16,
2011, and to reimburse those sellers the difference between par value and the actual sales price plus reasonable
interest. E*TRADE Securities LLC agreed to hold open the Purchase Offer until May 15, 2012, and to various
other undertakings set forth in the Consent Order, including the establishment of a dedicated toll-free telephone
assistance line and website to provide information and to respond to questions regarding the Consent Order. As
of December 31, 2011, the total amount of auction rate securities held by Colorado customers was approximately
$1.2 million and the total amount of auction rate securities held by E*TRADE Securities LLC customers
nationwide (including Colorado customers) was $61.3 million. The Company recorded a reserve of $48 million
in the other operating expense line item of the consolidated statement of income (loss). The reserve represented
the Company’s estimate of the current fair value relative to par value of auction rate securities held by
E*TRADE Securities LLC customers, as well as former customers who purchased auction rate securities through
E*TRADE Securities LLC and are covered by the Consent Order. The agreement includes the resolution of all
material individual auction rate securities arbitrations and litigations. The reserve also includes penalties and
other estimated settlement costs.

On August 24, 2010, the South Carolina Securities Division filed an administrative complaint before the
Securities Commissioner of South Carolina against E*TRADE Securities LLC based upon purchases of auction
rate securities through E*TRADE Securities LLC by South Carolina residents. The complaint sought to suspend
the South Carolina broker-dealer license of E*TRADE Securities LLC until South Carolina customers who
purchased auction rate securities through E*TRADE Securities LLC and who wished to liquidate those positions
were able to do so, and sought a fine not to exceed $10,000 for each potential violation of South Carolina statutes
or rules. On March 25, 2011, E*TRADE Securities LLC, without admitting or denying the underlying
allegations, findings or conclusions, resolved the South Carolina administrative action by entering into a consent
order, pursuant to which E*TRADE Securities LLC agreed to pay a $10,000 civil penalty and to reimburse the
South Carolina Securities Division’s investigative costs of $2,500. As of December 31, 2011, no existing South
Carolina customers held any auction rate securities.

the defendants engaged in patent

law. Plaintiff seeks
Plaintiff contends that
unspecified damages and an injunction against future infringements, plus royalties, costs, interest and attorneys’
fees. On September 30, 2011, the Company and several co-defendants filed a motion to transfer the case to the
Southern District of New York. Venue discovery occurred throughout December 2011. On January 1, 2012, a
new judge was assigned to the case. The Company will defend itself vigorously in this matter.

infringement under federal

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 LLC,
along with numerous other financial institutions, is a named defendant, but has not been served with process. 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. E*TRADE Capital Markets, LLC, along with numerous other financial institutions, is a
named defendant. 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. E*TRADE Capital Markets LLC
is a named defendant. 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.
E*TRADE Clearing LLC is a named defendant. There have been several motions filed by various parties to
transfer venue and to consolidate these actions. The Company’s time to answer or otherwise respond to the
complaint has been stayed pending further orders of Court. The Company will 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 reasonably estimate a range of possible losses on its remaining
outstanding legal proceedings; however, the Company believes any losses 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.

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.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

The following table shows the high and low sale prices of our common stock as reported by the NASDAQ

for the periods indicated:

2011:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

2010:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$18.13
$16.83
$16.66
$11.69

$18.50
$19.90
$15.60
$16.24

$14.60
$13.23
$ 9.07
$ 7.42

$14.10
$11.73
$11.15
$13.73

The closing sale price of our common stock as reported on the NASDAQ on February 17, 2012 was $9.35

per share. At that date, there were 1,648 holders of record of our common stock.

Dividends

We have never declared or paid cash dividends on our common stock. The terms of our corporate debt
currently prohibit the payment of dividends and will continue to prohibit the payment of dividends for the
foreseeable future. E*TRADE Bank may not pay dividends to the parent company without approval from its
regulators. This dividend restriction includes E*TRADE Securities LLC and E*TRADE Clearing LLC as they
are subsidiaries of E*TRADE Bank.

Equity Compensation Plan Information

Refer to Note 18—Employee Shared-Based Payments and Other Benefits of Item 8. Financial Statements

and Supplementary Data for equity compensation plan information.

Performance Graph

The following performance graph shows the cumulative total return to a holder of the Company’s common
stock, assuming dividend reinvestment, compared with the cumulative total
return, assuming dividend
reinvestment, of the S&P 500 and the S&P Super Cap Diversified Financials during the period from
December 31, 2006 through December 31, 2011.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among E*Trade Financial Corporation, the S&P 500 Index,
and S&P Composite 1500 Diversified Financials

$120

$100

$80

$60

$40

$20

12/06

12/07

12/08

12/09

12/10

12/11

E*Trade Financial Corporation

S&P 500

S&P Composite 1500 Diversified Financials

*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

E*TRADE Financial Corporation
S&P 500
S&P Composite 1500 Diversified Financials

12/06

12/07

12/08

12/09

12/10

12/11

100.00
100.00
100.00

15.83
105.49
85.64

5.13
66.46
39.44

7.85
84.05
52.71

7.14
96.71
55.88

3.55
98.75
40.04

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

(Dollars in millions, shares in thousands, except per share amounts):

Results of Operations:(1)

Net operating interest income
Total net revenue
Provision for loan losses
Income (loss) from continuing

operations
Net income (loss)
Basic earnings (loss) per share
from continuing operations
Diluted earnings (loss) per share
from continuing operations
Basic net earnings (loss) per share
Diluted net earnings (loss) per

Weighted average shares—

Year Ended December 31,

Variance

2011

2010

2009

2008

2007

2011 vs. 2010

$ 1,220.0
$ 2,036.6
440.6
$

$ 1,226.3
$ 2,077.9
779.4
$

$ 1,260.6
$ 2,217.0
$ 1,498.1

$1,268.0
$1,925.6
$1,583.7

$ 1,583.6
161.7
$
640.1
$

(1)%
(2)%
(43)%

$
156.7
$ 156.7

$
$

0.59

0.54
0.59

0.54

$
$

(28.5) $(1,297.8) $ (809.4) $(1,442.3)
(28.5) $(1,297.8) $ (511.8) $(1,441.8)

(0.13) $ (11.85) $ (15.88) $ (33.98)

(0.13) $ (11.85) $ (15.88) $ (33.98)
(0.13) $ (11.85) $ (10.04) $ (33.97)

(0.13) $ (11.85) $ (10.04) $ (33.97)

*
*

26%

37%

basic

267,291

211,302

109,544

50,986

42,444

Weighted average shares—

diluted

289,822

211,302

109,544

50,986

42,444

*
(1)

Percentage not meaningful.
In 2008, the Company sold its Canadian brokerage business and exited its direct retail lending business.

(Dollars in millions):

Financial Condition:

Available-for-sale securities
Held-to-maturity securities
Margin receivables
Loans receivable, net
Total assets
Deposits
Corporate debt

Interest-bearing
Non-interest-bearing

Shareholders’ equity

2011

2010

2009

2008

2007

2011 vs. 2010

December 31,

Variance

6%
147%
(6)%
(18)%
3%
5%

1%
(94)%
22%

$15,651.5
$ 6,079.5
$ 4,826.3
$12,332.8
$47,940.5
$26,460.0

$14,805.7
$ 2,462.7
$ 5,120.6
$15,121.9
$46,373.0
$25,240.3

$13,319.7
$
$ 3,827.2
$19,167.1
$47,366.5
$25,597.7

$10,806.1

$11,255.0

— $

$ 2,791.2
$24,451.8
$48,538.2
$26,136.2

—
$ 7,179.2
$30,038.8
$56,845.9
$25,884.8

$ 2,750.5
$
$ 2,591.5

— $

$ 3,022.7
—
$ 2,829.1

$ 1,450.5
$
43.0
$ 4,928.0

$ 1,441.9
$
704.0
$ 4,052.4

$ 1,437.8
$ 1,020.9
$ 3,749.6

5%
(2)%

(6)%
4%
*
(2)%

As of or For the Year Ended December 31,

Variance

2011

2010

2009

2008

2007

2011 vs. 2010

157,475

150,532

179,183

169,075

11.01 $

11.21 $

11.33 $

10.98 $

161,119
11.57

Customer Activity Metrics:(1)

DARTs
Average commission per trade
Margin receivables (dollars in

billions)

End of period brokerage accounts
Net new brokerage accounts
Customer assets (dollars in billions) $
Net new brokerage assets (dollars in

2,783,012
98,701

172.4 $

2,684,311
54,232
176.2 $

2,630,079
114,273

2,515,806
142,541

150.5 $

110.1 $

4.8 $

5.1 $

3.7 $

2.7 $

6.6
2,373,265
4,688
181.3

billions)

Brokerage related cash (dollars in

billions)

Company Metrics:

Corporate cash (dollars in millions)
E*TRADE Financial Tier I leverage

ratio

E*TRADE Financial Tier I common

ratio

E*TRADE Bank Tier I capital ratio
Special mention loan delinquencies

(dollars in millions)

Allowance for loan losses (dollars in

millions)

Enterprise net interest spread
Enterprise interest-earning assets
(average dollars in billions)
Total employees (period end)

9.7 $

8.1 $

7.2 $

3.9 $

(13.3)

27.7 $

24.5 $

20.4 $

15.8 $

17.5

484.4 $

470.5 $

393.2 $

434.9 $

312.4

5.7%

9.4%
7.8%

3.6%

N/A

4.8%
7.3%

N/A
6.7%

N/A
6.3%

N/A
6.2%

13%

2.1%

4.6%
0.5%

467.1 $

589.4 $

804.5 $

1,035.1 $

612.2

(21)%

822.8 $
2.79%

1,031.2 $
2.91%

1,182.7 $
2.72%

1,080.6 $
2.52%

508.2

(20)%
2.64% (0.12)%

42.7 $
3,240

41.1 $
2,962

44.5 $
3,084

46.9 $
3,249

56.1
3,757

4%
9%

Percentage not meaningful.

*
(1) Metrics have been represented to exclude activity from discontinued operations for the years ended December 31, 2008 and 2007, and international

local market trading for the years ended December 31, 2009, 2008 and 2007.

The selected consolidated financial data should be read in conjunction with Item 7. Management’s Discussion and

Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and the

related notes that appear elsewhere in this document.

GLOSSARY OF TERMS

In analyzing and discussing our business, we utilize certain metrics, ratios and other terms that are defined
in the Glossary of Terms, which is located at the end of Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

OVERVIEW

Strategy

Our core business is our trading and investing customer franchise. Building on the strengths of this

franchise, our growth strategy is focused on:

•

Strengthening our overall financial and franchise position. We are focused on strengthening our
overall capital structure and continuing to mitigate credit losses in our loan portfolio. We are also
focused on positioning the Company for
future growth and maintaining disciplined expense
management.

• Optimizing the value of our bank franchise. Our retail brokerage business generates a significant
amount of customer cash and we plan to continue to utilize our bank to optimize the value of these
customer deposits.

Key Factors Affecting Financial Performance

Our financial performance is affected by a number of factors outside of our control, including:

•

customer demand for financial products and services;

• weakness or strength of the residential real estate and credit markets;

•

performance, volume and volatility of the equity and capital markets;

customer perception of the financial strength of our franchise;

• market demand and liquidity in the secondary market for mortgage loans and securities;

• market demand and liquidity in the wholesale borrowings market, including securities sold under

agreements to repurchase;

•

our ability to obtain regulatory approval to move capital from our bank to our parent company; and

changes to the rules and regulations governing the financial services industry.

In addition to the items noted above, our success in the future will depend upon, among other things:

•

continuing our success in the acquisition, growth and retention of trading customers;

our ability to generate meaningful growth in the long-term investing customer group;

our ability to assess and manage credit risk;

our ability to generate capital sufficient to meet our operating needs at both our bank and our parent
company;

our ability to assess and manage interest rate risk; and

disciplined expense control and improved operational efficiency.

Management monitors a number of metrics in evaluating the Company’s performance. The most significant

of these are shown in the table and discussed in the text below:

Customer Activity Metrics:(1)

DARTs
Average commission per trade
Margin receivables (dollars in billions)
End of period brokerage accounts
Net new brokerage accounts
Customer assets (dollars in billions)
Net new brokerage assets (dollars in billions)
Brokerage related cash (dollars in billions)

Company Financial Metrics:

Corporate cash (dollars in millions)
E*TRADE Financial Tier I leverage ratio
E*TRADE Financial Tier I common ratio
E*TRADE Bank Tier I capital ratio
Special mention loan delinquencies (dollars in

millions)

Allowance for loan losses (dollars in millions)
Enterprise net interest spread
Enterprise interest-earning assets (average dollars

in billions)

As of or For the
Year Ended December 31,

Variance

2011

2010

2009

2011 vs. 2010

157,475
11.01
4.8
2,783,012
98,701
172.4
9.7
27.7

484.4

5.7%
9.4%
7.8%

467.1
822.8

2.79%

42.7

$
$

$
$
$

$
$

150,532
11.21
5.1
2,684,311
54,232
176.2
8.1
24.5

470.5

3.6%
4.8%
7.3%

589.4
1,031.2

2.91%

41.1

$
$

$
$
$

$
$

$
$
$

$
$

179,183
11.33
3.7
2,630,079
114,273
150.5
7.2
20.4

393.2
N/A
N/A
6.7%

5%
(2)%
(6)%
4%
*
(2)%
*
13%

3%
2.1%
4.6%
0.5%

804.5
1,182.7

2.72%

(21)%
(20)%
(0.12)%

44.5

*
(1)

Percentage not meaningful.
The year ended December 31, 2009 presented has been updated to exclude international local market trading.

Customer Activity Metrics

• DARTs are the predominant driver of commissions revenue from our customers.

• Average commission per trade is an indicator of changes in our customer mix, product mix and/or

product pricing.

• Margin receivables represent credit extended to customers to finance their purchases of securities by
borrowing against securities they own. Margin receivables are a key driver of net operating interest income.

• End of period brokerage accounts and net new brokerage accounts are indicators of our ability to attract

and retain brokerage customers.

• Changes in customer assets are an indicator of the value of our relationship with the customer. An
increase in customer assets generally indicates that the use of our products and services by existing and
new customers is expanding. Changes in this metric are also driven by changes in the valuations of our
customers’ underlying securities.

• Net new brokerage assets are total inflows to all new and existing brokerage accounts less total
outflows from all closed and existing brokerage accounts and are a general indicator of the use of our
products and services by existing and new brokerage customers.

• Customer cash and deposits, particularly brokerage related cash, are an indicator of a deepening

engagement with our customers and are a key driver of net operating interest income.

Company Financial Metrics

• Corporate cash is an indicator of the liquidity at the parent company. It is the primary source of capital

above and beyond the capital deployed in our regulated subsidiaries.

• E*TRADE Financial Tier I leverage ratio is Tier I capital divided by average total assets for the
holding company for leverage capital purposes. E*TRADE Financial Tier I common ratio is Tier I
capital less elements of Tier I capital that are not in the form of common equity, such as trust preferred
securities, divided by total risk-weighted assets for the holding company. The Tier I leverage and Tier I
common ratios are non-GAAP measures as the holding company is not yet held to these capital
requirements. See Liquidity and Capital Resources for a reconciliation of these non-GAAP measures to
the comparable GAAP measures.

• E*TRADE Bank Tier I capital ratio is Tier I capital divided by adjusted total assets for E*TRADE

Bank and is an indication of E*TRADE Bank’s capital adequacy.

•

Special mention loan delinquencies are loans 30-89 days past due and are an indicator 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.

• Allowance for loan losses is an estimate of probable losses inherent in the loan portfolio as of the
balance sheet date and is typically equal to management’s forecast of loan losses in the twelve months
following the balance sheet date as well as the forecasted losses, including economic concessions to
borrowers, over the estimated remaining life of loans modified as troubled debt restructurings
(“TDR”). See Summary of Critical Accounting Policies and Estimates for a discussion of the estimates
and assumptions used in the allowance for loan losses.

• Enterprise interest-earning assets, in conjunction with our enterprise net interest spread, are indicators

of our ability to generate net operating interest income.

Significant Events in 2011

Enhancements to Our Trading and Investing Products and Services

• We continued to grow our sales force, increasing our financial consultant team by 42% in 2011, as we
continued to focus on engagement with long-term and retirement investors, as well as corporate clients;

• We developed E*TRADE 360, a fully dynamic and customizable online investing dashboard now

available to all customers.

• We developed a newly redesigned public website featuring simplified navigation, personalization

based on objectives and experience levels, and enhanced content.

• We launched the E*TRADE Community, which utilizes social media to offer customers a platform to

interact with one another and share ideas and strategies with other E*TRADE customers;

• We added several new features to our E*TRADE Pro platform, including new options strategies (multi-

legged orders), expanded CNBC content and logarithmic charts;

• We introduced a suite of sophisticated Options Tools designed to help traders quickly and easily

identify and analyze potential investment opportunities;

• We provided E*TRADE Securities’ customers with access to the AIG public offering, advocating for
retail investors to have access to initial public offerings and other offerings typically limited to
institutional investors;

• We launched a number of enhancements for Mobile Pro, including mobile check deposit capability for

Apple iPhone® and AndroidTM;

• We introduced weekly options on select stocks, indexes and ETFs;

• We expanded tools, education and research offerings in the Bond Resource Center;

• We continued to expand our free investor education offerings across a number of channels including

online videos, live and on-demand web seminars, and live events;

• We strengthened our retirement offering with Rollover Specialists as well as Certified Retirement
Planning Counselors added in nearly every branch, and expanded educational resources with additional
videos and seminars, commentary, planning checklists, Rollover Quiz, IRA selection tools and
upgraded Tax Center;

• We enhanced our customer service offering with 24/7 online chat capabilities, an e-mail platform

available to prospects, and an enhanced online service center;

• We launched portfolio margin accounts, which provide sophisticated traders with additional tools to

manage risk and leverage capital;

• We introduced unified managed account advisory services to long-term investors seeking professional

money management services with an investment of $250,000 or more; and

• We expanded our corporate services client base by bringing on 46 new clients and continued to execute
our strategy to service both private and public companies as a foundation for future retail brokerage
account growth.

Market Recognition

• Our corporate services business received top ratings in overall satisfaction and loyalty among broker
plan administrators by Group Five, an independent consulting and research firm, in its 2011 Stock Plan
Administration Benchmarking Study; and

• Our customer service team was awarded the 2011 International Service Excellence Award in the
Contact Center category, based on a proven display of excellence, professionalism and outstanding
service achievement.

Issuance and Extinguishment of Senior Notes

• During the year, we issued an aggregate principal amount of $435 million in 6 3⁄4% senior notes due
May 2016 (“2016 Notes”). We used the proceeds to redeem all of the outstanding 7 3⁄ 8% senior notes
due September 2013 (“2013 Notes”), including paying the associated redemption premium, accrued
interest and related fees and expenses.

Conversions of Convertible Debentures

• During the year, a total of $660.9 million in convertible debentures were converted into 63.9 million

shares of common stock, increasing shareholders’ equity by $661 million.

Legal Settlements for the Auction Rate Securities and Freudenberg Matters

• We reached a settlement with the Colorado Division of Securities and the NASAA whereby E*TRADE
Securities LLC offered to purchase auction rate securities from eligible investors who purchased those
securities through E*TRADE Securities LLC. We recorded a reserve of $48 million in connection with
this settlement. We also entered into a memorandum of understanding to settle the Freudenberg Action,
which resulted in the recording of a net reserve of $10.8 million as of December 31, 2011.

EARNINGS OVERVIEW

2011 Compared to 2010

We generated net income of $156.7 million, or $0.54 per diluted share, on total net revenue of $2.0 billion
for the year ended December 31, 2011. Commissions, fees and service charges, principal transactions and other
revenue decreased 2% to $711.3 million for the year ended December 31, 2011 compared to 2010, which was
driven primarily by the elimination of all account activity fees, which took effect in the second quarter of 2010.
In addition, gains on loans and securities, net and net impairment decreased 18% to $105.3 million for the year
ended December 31, 2011 compared to 2010.

Provision for loan losses declined 43% to $440.6 million for the year ended December 31, 2011 compared
to 2010, driven by improving credit trends and loan portfolio run-off. Total operating expenses increased 8% to
$1.2 billion for the year ended December 31, 2011 compared to 2010. This increase was driven primarily by
increases in advertising and market development expense, FDIC insurance premiums and other operating
expenses during the year ended December 31, 2011.

The following sections describe in detail the changes in key operating factors and other changes and events
that affected net revenue, provision for loan losses, operating expense, other income (expense) and income tax
expense (benefit).

Revenue

The components of revenue and the resulting variances are as follows (dollars in millions):

Net operating interest income
Commissions
Fees and service charges
Principal transactions
Gains on loans and securities, net
Net impairment
Other revenues

Total non-interest income

Total net revenue

Net Operating Interest Income

Year Ended December 31,

2011 vs. 2010

2011

2010

Amount %

Variance

1,220.0
436.2
130.4
105.4
120.2
(14.9)
39.3

$1,226.3
431.0
142.4
103.4
166.2
(37.7)
46.3

$ (6.3)
5.2
(12.0)
2.0
(46.0)
22.8
(7.0)

816.6

851.6

(35.0)

2,036.6

$2,077.9

$(41.3)

(1)%
1%
(8)%
2%
(28)%
(60)%
(15)%

(4)%

(2)%

Net operating interest income decreased 1% to $1.2 billion for the year ended December 31, 2011 compared
to 2010. Net operating interest income is earned primarily through investing customer cash and deposits in
interest-earning assets, which include: margin receivables, real estate loans, available-for-sale securities and
held-to-maturity securities.

The following table presents enterprise average balance sheet data and enterprise income and expense data for
our operations, as well as the related net interest spread, yields and rates and has been prepared on the basis required
by the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” (dollars in millions):

Year Ended December 31,

2011

2010

2009

Average
Balance

Operating
Interest
Inc./Exp.

Average
Yield/
Cost

Average
Balance

Operating
Interest
Inc./Exp.

Average
Yield/
Cost

Average
Balance

Operating
Interest
Inc./Exp.

Average
Yield/
Cost

Enterprise interest-earning assets:
Loans(1)
Margin receivables
Available-for-sale securities
Held-to-maturity securities
Cash and equivalents
Segregated cash and investments
Securities borrowed and other

$14,689.8 $ 692.1
221.7
422.5
136.9
3.2
0.9
48.8

5,374.8
15,326.5
4,177.1
1,618.9
915.6
620.9

4.71% $18,302.2 $ 879.0
200.3
4.13% 4,532.5
387.5
2.76% 13,275.9
35.9
3.28% 1,085.8
5.4
0.20% 2,414.3
1.9
857.1
0.10%
29.4
662.9
7.85%

4.80% $23,113.6 $1,138.1
138.5
4.42% 3,103.5
473.1
2.92% 11,593.3
—
3.31%
—
14.8
0.22% 4,215.7
4.2
0.22% 1,785.7
50.4
690.4
4.43%

Total enterprise interest-earning assets

42,723.6

1,526.1

3.57% 41,130.7

1,539.4

3.74% 44,502.2

1,819.1

Non-operating interest-earning and non-

interest earning assets(2)

Total assets

4,339.5

$47,063.1

4,395.1

$45,525.8

3,873.3

$48,375.5

4.92%
4.46%
4.08%
—
0.35%
0.23%
7.30%

4.09%

Enterprise interest-bearing liabilities:

Retail deposits:

Sweep deposits
Complete savings deposits
Other money market and savings

deposits

Checking deposits
Certificates of deposit

Brokered certificates of deposit
Customer payables
Securities sold under agreements to

repurchase

Federal Home Loan Bank (“FHLB”)
advances and other borrowings

Securities loaned and other

Total enterprise interest-bearing

liabilities

$17,513.1
6,174.4

13.4
16.1

0.08% $14,014.4
0.26% 7,577.0

1,071.5
783.2
270.7
48.8
5,456.3

2.5
0.8
7.3
2.7
8.6

0.23% 1,114.6
761.9
0.10%
795.3
2.70%
115.3
5.58%
0.16% 4,713.2

10.1
28.6

2.8
0.9
14.5
5.9
7.0

0.07% $11,022.3
0.38% 11,539.9

7.6
140.1

0.25% 1,243.7
0.11%
797.5
1.82% 1,750.4
193.8
5.14%
0.15% 4,662.9

5.9
3.0
45.2
10.0
8.8

0.07%
1.21%

0.47%
0.37%
2.58%
5.17%
0.19%

5,417.2

153.1

2.83% 6,154.3

129.6

2.11% 6,725.4

200.1

2.98%

2,741.1
634.8

106.2
1.5

3.87% 2,754.3
622.4
0.23%

119.3
1.6

4.33% 3,392.0
513.0
0.26%

148.8
2.4

4.38%
0.46%

40,111.1

312.2

0.78% 38,622.7

320.3

0.83% 41,840.9

571.9

1.37%

Non-operating interest-bearing and non-

interest bearing liabilities(3)

Total liabilities
Total shareholders’ equity

Total liabilities and shareholders’

equity

2,285.9

42,397.0
4,666.1

$47,063.1

2,876.4

41,499.1
4,026.7

$45,525.8

3,558.5

45,399.4
2,976.1

$48,375.5

Excess of enterprise interest-earning

assets over enterprise interest-bearing
liabilities/Enterprise net interest
income/Spread

$ 2,612.5 $1,213.9

2.79% $ 2,508.0 $1,219.1

2.91% $ 2,661.3 $1,247.2

2.72%

Reconciliation from enterprise net interest income to net operating interest income (dollars in millions):

Enterprise net interest income
Taxable equivalent interest adjustment
Customer cash held by third parties and other(4)

Net operating interest income

Year Ended December 31,

2011

2010

2009

$1,213.9
(1.2)
7.3

$1,219.1
(1.2)
8.4

$1,247.2
(2.1)
15.5

$1,220.0

$1,226.3

$1,260.6

(1) Nonaccrual loans are included in the respective average loan balances. Income on such nonaccrual loans is recognized on a cash basis.
(2) Non-operating interest-earning and non-interest earning assets consist of property and equipment, net, goodwill, other intangibles, net

and other assets that do not generate operating interest income. Some of these assets generate corporate interest income.

(3) Non-operating interest-bearing and non-interest bearing liabilities consist of corporate debt and other liabilities that do not generate

(4)

operating interest expense. Some of these liabilities generate corporate interest expense.
Includes interest earned on average customer assets of $3.7 billion, $3.1 billion and $2.9 billion for the years ended December 31, 2011,
2010 and 2009, respectively, held by parties outside the Company, including third party money market funds and sweep deposit accounts
at unaffiliated financial institutions.

Enterprise net interest:

Spread
Margin (net yield on interest-earning assets)

Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities
Return on average:

Total assets
Total shareholders’ equity
Average equity to average total assets

Year Ended December 31,

2011

2010

2009

2.79%
2.84%

2.72%
2.91%
2.80%
2.96%
106.51% 106.49% 106.36%

0.33% (0.06)% (2.68)%
3.36% (0.71)% (43.61)%
6.15%
8.84%
9.91%

The fluctuation in enterprise interest-earning assets is driven primarily by changes in enterprise interest-
earning liabilities, specifically customer cash and deposits. Average enterprise interest-earning assets increased
4% to $42.7 billion for the year ended December 31, 2011 compared to 2010. This was primarily a result of the
increases in average margin receivables and average available-for-sale and held-to-maturity securities, offset by
decreases in average loans and average cash and equivalents.

Average enterprise interest-bearing liabilities increased 4% to $40.1 billion for the year ended December 31,
2011 compared to 2010. The increase in average enterprise interest-bearing liabilities was primarily due to
increases in average sweep deposits and average customer payables, offset by a decrease in average securities
sold under agreements to repurchase.

Enterprise net interest spread decreased by 12 basis points to 2.79% for the year ended December 31, 2011
compared to 2010, reflecting yields on average enterprise interest-earning assets and the current interest rate
environment. We expect enterprise net interest spread to continue to compress and, given the continued
challenges of the current interest rate environment, our enterprise net interest spread could average less than
2.50% for the year ending December 31, 2012.

Commissions

Commissions revenue increased 1% to $436.2 million for the year ended December 31, 2011 compared to
2010. The main factors that affect commissions are DARTs, average commission per trade and the number of
trading days during the period. Average commission per trade is impacted by different trade types (e.g. equities,
options, fixed income, stock plan, exchange-traded funds, mutual funds and cross border) that can have different
commission rates. Accordingly, changes in the mix of trade types will impact average commission per trade.

DART volume increased 5% to 157,475 for the year ended December 31, 2011 compared to 2010. Option-
related DARTs as a percentage of total DARTs represented 21% of trading volume for the year ended
December 31, 2011 compared to 17% in 2010. Exchange-traded funds-related DARTs as a percentage of total
DARTs represented 11% of trading volume for the year ended December 31, 2011 compared to 10% in 2010.

Average commission per trade decreased 2% to $11.01 for the year ended December 31, 2011 compared to
2010. The decrease was driven by a change in the customer mix; specifically customers who have a higher
commission per trade traded less during the year compared to our active trader customers, who generally have
lower commission per trade, when compared to 2010.

Fees and Service Charges

Fees and service charges decreased 8% to $130.4 million for the year ended December 31, 2011 compared
to 2010. The decrease for the year ended December 31, 2011 was primarily due to the elimination of all account
activity fees, which took effect in the second quarter of 2010.

Principal Transactions

Principal transactions increased 2% to $105.4 million for the year ended December 31, 2011 compared to
2010. Principal transactions are derived from our market making business in which we act as a market-maker for
our brokerage customers’ orders as well as orders from third party customers. The increase in principal
transactions revenue was driven by a favorable mix of trading volume and revenue earned per share, as well as a
continued focus on expanding our external customer base, when compared to 2010.

Gains on Loans and Securities, Net

Gains on loans and securities, net were $120.2 million for the year ended December 31, 2011 compared to

$166.2 million in 2010, as shown in the following table (dollars in millions):

Gains on loans, net

Gains on available-for-sale securities, net
Gains (losses) on trading securities, net
Hedge ineffectiveness

Gains on securities, net

Gains on loans and securities, net

Percentage not meaningful.

Year Ended

Variance

December 31,

2011 vs. 2010

2011

2010

Amount %

0.1

6.3

$ (6.2)

124.4
(1.9)
(2.4)

120.1

160.7
0.2
(1.0)

159.9

(36.3)
(2.1)
(1.4)

(23)%
*
*

(39.8)

(25)%

$120.2

$166.2

$(46.0)

(28)%

The decrease of 28% to $120.2 million in gains on loans and securities, net for the year ended December 31,

2011 compared to 2010, was primarily due to more trading volatility in 2010 when compared to 2011.

Net Impairment

We recognized $14.9 million of net impairment during the year ended December 31, 2011, on certain
securities in our non-agency CMO portfolio due to continued deterioration in the expected credit performance of
the underlying loans in those specific securities. The gross other-than-temporary impairment (“OTTI”) and the
noncredit portion of OTTI, which was or had been previously recorded through other comprehensive income, are
shown in the table below (dollars in millions):

Other-than-temporary impairment (“OTTI”)
Less: noncredit portion of OTTI recognized into (out of)other comprehensive

income (loss) (before tax)

Net impairment

Other Revenues

Year Ended
December 31,

2011

2010

$ (9.2)

$(41.5)

(5.7)

3.8

$(14.9)

$(37.7)

Other revenues decreased 15% to $39.3 million for the year ended December 31, 2011 compared to 2010.
The decrease was due primarily to the gain on sale of approximately $1 billion in savings accounts to Discover
Financial Services in the first quarter of 2010, which increased other revenues during the year ended
December 31, 2010.

Provision for Loan Losses

Provision for loan losses decreased 43% to $440.6 million for the year ended December 31, 2011 compared
to 2010. The decrease in provision for loan losses was driven by improving credit trends and loan portfolio
run-off, as evidenced by the lower levels of delinquent loans in the one- to four-family and home equity loan
portfolios. The provision for loan losses has declined for three consecutive years, down 72% from its peak of
$1.6 billion for the year ended December 31, 2008. We expect provision for loan losses to continue to decline in
2012 compared to 2011, although it is subject to variability from quarter to quarter.

As we transition from the OTS to the OCC, we are evaluating programs and practices that were designed in
accordance with guidance from the OTS. We are working to align certain policies and procedures to the guidance
from the OCC and have suspended certain loan modification programs that will require changes. We increased
the qualitative reserve in 2011 to reflect additional estimated losses during the period of reduced activity in our
modification programs, as well as uncertainty around certain loans modified under our previous programs. Once
the evaluation of the existing programs and practices is complete and any necessary changes have been
implemented, we will re-assess the overall qualitative reserve.

Operating Expense

The components of operating expense and the resulting variances are as follows (dollars in millions):

Compensation and benefits
Clearing and servicing
Advertising and market development
FDIC insurance premiums
Professional services
Occupancy and equipment
Communications
Depreciation and amortization
Amortization of other intangibles
Facility restructuring and other exit activities
Other operating expenses

Total operating expense

Percentage not meaningful.

Compensation and Benefits

Year Ended

December 31,

Variance

2011 vs. 2010

2011

2010

Amount %

$ 333.6
147.1
145.2
105.4
89.7
68.8
67.3
89.6
26.2
7.7
154.3

$ 325.0
147.5
132.2
77.7
81.2
70.9
73.3
87.9
28.5
14.4
104.0

$ 8.6
(0.4)
13.0
27.7
8.5
(2.1)
(6.0)
1.7
(2.3)
(6.7)
50.3

3%
(0)%
10%
36%
10%
(3)%
(8)%
2%
(8)%
*
48%

$1,234.9

$1,142.6

$92.3

Compensation and benefits increased 3% to $333.6 million for the year ended December 31, 2011 compared
to 2010. The increase resulted primarily from higher compensation expense as a result of increasing our financial
consultants by 42%, partially offset by a decrease in incentive compensation.

Advertising and Market Development

Advertising and market development expense increased 10% to $145.2 million for the year ended
December 31, 2011 compared to 2010. This fluctuation was due largely to the planned increase in advertising
expenditures in our continuing effort to attract new accounts and customer assets during the year ended
December 31, 2011.

FDIC Insurance Premiums

FDIC insurance premiums increased 36% to $105.4 million for the year ended December 31, 2011
compared to 2010. The increase was due primarily to an industry wide change in the FDIC insurance premium
assessment calculation, effective in the second quarter of 2011.

Professional Services

Professional services increased 10% to $89.7 million for the year ended December 31, 2011 compared to
2010. The increase was due primarily to a $6.0 million credit in connection with a legal settlement in the third
quarter of 2010, which decreased professional services for the year ended December 31, 2010. There were no
similar settlements made during the year ended December 31, 2011.

Communications

Communications expense decreased 8% to $67.3 million for the year ended December 31, 2011 compared

to 2010. The decrease was driven primarily by a decline in vendor services fees compared to 2010.

Other Operating Expenses

Other operating expenses increased 48% to $154.3 million for the year ended December 31, 2011 compared
to 2010. The increase was driven by a reserve of $48 million related to an offer to purchase auction rate securities
held by customers of E*TRADE Securities LLC, as well as former customers who purchased auction rate
securities through E*TRADE Securities LLC. This reserve relates primarily to our estimate of the securities’
current fair value relative to their par value and includes penalties and other estimated settlement costs. We also
entered into a memorandum of understanding to settle the Freudenberg Action, which resulted in the recording of
a net reserve of $10.8 million for the year ended December 31, 2011.

Other Income (Expense)

Other income (expense) increased 11% to $175.8 million for the year ended December 31, 2011 compared

to 2010 as shown in the following table (dollars in millions):

Corporate interest income
Corporate interest expense
Gains on sales of investments, net
Gains on early extinguishment of debt
Equity in loss of investments and venture funds

Total other income (expense)

Percentage not meaningful.

Year Ended

Variance

December 31,

2011 vs. 2010

2011

2010

Amount %

0.7
(177.8)
—
3.1
(1.8)

6.2
(167.1)
2.7
—
(0.8)

$ (5.5)
(10.7)
(2.7)
3.1
(1.0)

(89)%
6%
*
*
*

$(175.8) $(159.0) $(16.8)

11%

Total other income (expense) primarily consisted of corporate interest expense on interest-bearing corporate
debt for the year ended December 31, 2011. Corporate interest expense increased 6% to $177.8 million for the
year ended December 31, 2011 compared to 2010. In addition to the stated interest on corporate debt, the
corporate interest expense line item included the benefit of discontinued fair value hedges on corporate debt,
which decreased $7.8 million for the year ended December 31, 2011 compared to 2010. Offsetting interest
expense for the year ended December 31, 2011 was a $3.1 million gain on early extinguishment of debt related to
the call of the 2013 Notes in the second quarter of 2011. Offsetting corporate interest expense for the year ended
December 31, 2010 was a benefit of $6.0 million related to a legal settlement.

Income Tax Expense (Benefit)

Income tax expense was $28.6 million for the year ended December 31, 2011 compared to $25.3 million in
2010. The effective tax rate was 15.4% for the year ended December 31, 2011 compared to 806.3% in 2010.
During the third quarter of 2011, we recorded an income tax benefit of $61.7 million related to the taxable
liquidation of a European subsidiary. The subsidiary was liquidated for U.S. tax purposes in connection with our
international restructuring activities. This liquidation resulted in the taxable recognition of certain losses,
including historical acquisition premiums that we incurred internationally. This tax benefit resulted in a
corresponding increase to the deferred tax assets, which were $1.6 billion as of December 31, 2011. For the year
ended December 31, 2010, our reported pre-tax loss was relatively close to breakeven, which resulted in an
unusually high effective tax rate.

Valuation Allowance

We are required to establish a valuation allowance for deferred tax assets and record a charge to income if
we determine, based on available evidence at the time the determination is made, that it is more likely than not
that some portion or all of the deferred tax assets will not be realized. If we did conclude that a valuation

allowance was required, the resulting loss could have a material adverse effect on our financial condition and
results of operations. Our analysis of the need for a valuation allowance recognizes that we are in a cumulative
book loss position as of the three-year period ended December 31, 2011, which is considered significant and
objective evidence that we may not be able to realize some portion of the deferred tax assets in the future.
However, we did not establish a valuation allowance against federal deferred tax assets as of December 31, 2011
as we believe that it is more likely than not that all of these assets will be realized. Approximately two-thirds of
existing federal deferred tax assets are not related to net operating losses and therefore, have no expiration date.
We expect to utilize the vast majority of the existing federal deferred tax assets over the next seven years, with a
small balance remaining as a result of the current limitation caused by the ownership change (which is expected
to be fully utilized in advance of the statutory carry forward period).

Our evaluation of the need for a valuation allowance focused on identifying significant, objective evidence
that we will be able to realize the deferred tax assets in the future. We determined that our expectations regarding
future earnings are objectively verifiable due to various factors. One factor is the consistent profitability of the
core business, the trading and investing segment, which has generated substantial income for each of the last
eight years, including through uncertain economic and regulatory environments. The core business is driven by
brokerage customer activity and includes trading, brokerage cash, margin lending, long-term investing and other
brokerage related activities. These activities drive variable expenses that correlate to the volume of customer
activity, which has resulted in stable, ongoing profitability in this business.

Another factor is the mitigation of losses in the balance sheet management segment, which generated a large
net operating loss in 2007 caused by the crisis in the residential real estate and credit markets. Much of this loss
came from the sale of the asset-backed securities portfolio and credit losses from the mortgage loan portfolio. We
no longer hold any of those asset-backed securities and shut down mortgage loan acquisition activities in 2007.
In effect, the key business activities that led to the generation of the deferred tax assets were shut down over four
the losses in the balance sheet management segment have continued to decline
years ago. As a result,
significantly. In addition, we continue to realize the benefit of various credit loss mitigation activities for the
mortgage loans purchased in 2007 and prior, most notably, actively reducing or closing unused home equity lines
of credit and aggressively exercising put-back clauses to sell back improperly documented loans to the
originators. As a result of these loss containment measures, provision for loan losses has declined for three
consecutive years, down 72% from its peak of $1.6 billion for the year ended December 31, 2008.

We maintain a valuation allowance for certain of our state deferred tax assets as it is more likely than not
that they will not be realized. At December 31, 2011, we had state deferred tax assets of approximately $102.1
million that related to our state net operating loss carry forwards and temporary differences with a valuation
allowance of $28.7 million against such deferred tax assets.

Tax Ownership Change

During the third quarter of 2009, we exchanged $1.7 billion principal amount of interest-bearing debt for an
equal principal amount of non-interest-bearing convertible debentures. Subsequent to the Debt Exchange, $592.3
million and $128.7 million debentures were converted into 57.2 million and 12.5 million shares of common stock
during the third and fourth quarters of 2009, respectively. As a result of these conversions, we believe we
experienced a tax ownership change during the third quarter of 2009.

As of the date of the ownership change, we had federal NOLs available to carry forward of approximately
$1.4 billion. Section 382 imposes restrictions on the use of a corporation’s NOLs, certain recognized built-in
losses and other carryovers after an “ownership change” occurs. Section 382 rules governing when a change in
ownership occurs are complex and subject to interpretation; however, an ownership change generally occurs
when there has been a cumulative change in the stock ownership of a corporation by certain “5% shareholders”
of more than 50 percentage points over a rolling three-year period.

Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a
corporation may offset with pre-ownership change NOLs. In general, the annual limitation is determined by
multiplying the value of the corporation’s stock immediately before the ownership change (subject to certain
adjustments) by the applicable long-term tax-exempt rate. Any unused portion of the annual limitation is
available for use in future years until such NOLs are scheduled to expire (in general, NOLs may be carried
forward 20 years). In addition, the limitation may, under certain circumstances, be increased or decreased by
built-in gains or losses, respectively, which may be present with respect to assets held at the time of the
ownership change that are recognized in the five-year period (one-year for loans) after the ownership change.
The use of NOLs arising after the date of an ownership change would not be affected unless a corporation
experienced an additional ownership change in a future period.

We believe the tax ownership change will extend the period of time it will take to fully utilize our
pre-ownership change NOLs, but will not limit the total amount of pre-ownership change NOLs we can utilize.
Our updated estimate is that we will be subject to an overall annual limitation on the use of our pre-ownership
change NOLs of approximately $194 million. The overall pre-ownership change NOLs, which were
approximately $1.4 billion, have a statutory carry forward period of 20 years (the majority of which expire in 16
years). As a result, we believe we will be able to fully utilize these NOLs in future periods.

Our ability to utilize the pre-ownership change NOLs is dependent on our ability to generate sufficient
taxable income over the duration of the carry forward periods and will not be impacted by our ability or inability
to generate taxable income in an individual year.

2010 Compared to 2009

We incurred a net loss of $28.5 million, or $(0.13) per diluted share, on total revenue of $2.1 billion for the
year ended December 31, 2010. Commissions, fees and service charges, principal transactions and other revenue
decreased 17% to $723.1 million for the year ended December 31, 2010 compared to 2009, which was driven by
a decrease in commissions.

Provision for loan losses declined 48% to $779.4 million for the year ended December 31, 2010 compared
to 2009, driven by improving credit trends and loan portfolio run-off. Total operating expense decreased 8% to
$1.1 billion for the year ended December 31, 2010 compared to 2009. This decrease was driven primarily by
decreases in majority of the operating expense categories, offset by a planned increase in advertising and market
development expense.

Revenue

The components of revenue and the resulting variances are as follows (dollars in millions):

Year Ended December 31,

2010 vs. 2009

2010

2009

Amount %

Variance

$1,226.3
431.0
142.4
103.4
166.2
(37.7)
46.3

$1,260.6
548.0
192.5
88.1
169.1
(89.1)
47.8

$ (34.3)
(117.0)
(50.1)
15.3
(2.9)
*
(1.5)

(3)%
(21)%
(26)%
17%
(2)%
*
(3)%

851.6

956.4

(104.8)

(11)%

$2,077.9

$2,217.0

$(139.1)

(6)%

Net operating interest income
Commissions
Fees and service charges
Principal transactions
Gains on loans and securities, net
Net impairment
Other revenues

Total non-interest income

Total net revenue

Percentage not meaningful.

Net Operating Interest Income

Net operating interest income decreased 3% to $1.2 billion for the year ended December 31, 2010 compared
to 2009. The slight decrease in net operating interest income was due primarily to a decrease in our average
interest earning assets of $3.4 billion during the year ended December 31, 2010, which was offset by an increase
in our net operating interest spread during the same period.

Average enterprise interest-earning assets decreased 8% to $41.1 billion for the year ended December 31,
2010 compared to 2009. This decrease was primarily a result of the decrease in our average loans portfolio,
average available-for-sale mortgage-backed securities and average cash and equivalents, partially offset by an
increase in average margin receivables, average available-for-sale and held-to-maturity securities.

Average enterprise interest-bearing liabilities decreased 8% to $38.6 billion for

the year ended
December 31, 2010 compared to 2009. The decrease in average enterprise interest-bearing liabilities was
primarily due to decreases in average complete savings deposits and average certificates of deposit offset by an
increase in average sweep deposits.

Enterprise net interest spread increased by 19 basis points to 2.91% for the year ended December 31, 2010
compared to 2009. This increase was largely driven by a decrease in the yields paid on our deposits and lower
wholesale borrowing costs, partially offset by a decrease in higher yielding enterprise interest-earning assets.

Commissions

Commissions decreased 21% to $431.0 million for the year ended December 31, 2010 compared to 2009.
Our DART volume decreased 16% to 150,532 for the year ended December 31, 2010 compared 2009. Option-
related DARTs as a percentage of our total DARTs represented 17% of trading volume for the year ended
December 31, 2010 compared to 13% in 2009. Exchange-traded funds-related DARTs as a percentage of total
DARTs represented 10% of trading volume for the year ended December 31, 2010 compared to 14% in 2009.

Average commission per trade decreased 1% to $11.21 for the year ended December 31, 2010 compared to
2009. The slight decrease in the average commission per trade was due primarily to the elimination of the $12.99
commission tier and the per share commission applied to market trades larger than 2,000 shares, which became
effective in the second quarter of 2010, partially offset by an improvement in the product and customer mix when
compared to 2009.

Fees and Service Charges

Fees and service charges decreased 26% to $142.4 million for the year ended December 31, 2010 compared
to 2009. The decrease was primarily due to the elimination of all account activity fees, which became effective in
the second quarter of 2010, and lower order flow revenue.

Principal Transactions

Principal transactions increased 17% to $103.4 million for the year ended December 31, 2010 compared to
2009. The increase in principal transactions was driven by an increase in the volume of orders from our third
party customers which was partially offset by a decrease in our average revenue earned per share traded when
compared to 2009.

Gains on Loans and Securities, Net

Gains on loans and securities, net were $166.2 million and $169.1 million for years ended December 31,

2010 and 2009, respectively, as shown in the following table (dollars in millions):

Gains (losses) on loans, net

Gains on available-for-sale securities, net
Gains on trading securities, net
Hedge ineffectiveness

Gains on securities, net

Gains on loans and securities, net

Percentage not meaningful.

Net Impairment

Variance

Year Ended December 31,

2010 vs. 2009

2010

2009

Amount %

6.3

$ (12.5)

$ 18.8

160.7
0.2
(1.0)

159.9

173.2
7.8
0.6

181.6

(12.5)
(7.6)
(1.6)

(7)%
(98)%
*

(21.7)

(12)%

$166.2

$169.1

$ (2.9)

(2)%

We recognized $37.7 million and $89.1 million of net impairment during the years ended December 31,
2010 and 2009, respectively, on certain securities in our non-agency CMO portfolio due to continued
deterioration in the expected credit performance of the underlying loans in the securities. The gross OTTI and the
noncredit portion of OTTI, which was or had been previously recorded through other comprehensive income
(loss), are shown in the table below (dollars in millions):

Other-than-temporary impairment (“OTTI”)
Less: noncredit portion of OTTI recognized into other comprehensive

income (loss) (before tax)

Net impairment

Year Ended December 31,

2010

2009

$(41.5)

$(232.1)

3.8

143.0

$(37.7)

$ (89.1)

Other Revenues

Other revenues decreased 3% to $46.3 million for the year ended December 31, 2010 compared to 2009.
The decrease was due to a decline in the income from the cash surrender value of our bank-owned life insurance,
partially offset by the gain on the sale of approximately $1 billion in savings accounts to Discover Financial
Services in the first quarter of 2010.

Provision for Loan Losses

Provision for loan losses decreased 48% to $779.4 million for the year ended December 31, 2010 compared
2009. The decrease in the provision for loan losses was driven by lower levels of delinquent loans in our one- to
four-family and home equity loan portfolios.

Operating Expense

The components of operating expense and the resulting variances are as follows (dollars in millions):

Total operating expense

Percentage not meaningful.

Compensation and Benefits

Year Ended December 31,

2010 vs. 2009

2010

2009

Amount %

Variance

$ 325.0
147.5
132.2
77.7
81.2
70.9
73.3
87.9
28.5
14.4
104.0

$ 366.2
170.7
114.4
94.3
78.7
78.4
84.4
83.3
29.7
20.7
122.5

$ (41.2)
(23.2)
17.8
(16.6)
2.5
(7.5)
(11.1)
4.6
(1.2)
(6.3)
(18.5)

(11)%
(14)%
16%
(18)%
3%
(10)%
(13)%
6%
(4)%
*
(15)%

$1,142.6

$1,243.3

$(100.7)

(8)%

Compensation and benefits decreased 11% to $325.0 million for the year ended December 31, 2010
compared to 2009. This decrease resulted from lower incentive compensation expense and lower salary expense
due to a reduction in our employee base compared to 2009.

Clearing and Servicing

Clearing and servicing expense decreased 14% to $147.5 million for the year ended December 31, 2010
compared to 2009. This decrease resulted primarily from lower trading volumes and lower loan balances compared to
2009.

Advertising and Market Development

Advertising and market development expense increased 16% to $132.2 million for the year ended
December 31, 2010 compared to 2009. This fluctuation was due largely to a planned increase in advertising
expense to attract new accounts and customer assets during the year ended December 31, 2010.

FDIC Insurance Premiums

FDIC insurance premiums decreased 18% to $77.7 million for the year ended December 31, 2010 compared
to 2009. The decrease was due primarily to an industry wide special assessment that resulted in an additional

$21.6 million of expense in the second quarter of 2009. There were no similar assessments made during the year
ended December 31, 2010.

Other Operating Expenses

Other operating expenses decreased 15% to $104.0 million for the year ended December 31, 2010 compared
to 2009. The decrease was driven primarily by a decline in bad debt expense, real-estate owned and legal
reserves compared to 2009.

Other Income (Expense)

Other income (expense) was an expense of $159.0 million and $1.3 billion for the years ended

December 31, 2010 and 2009, respectively, as shown in the following table (dollars in millions):

Corporate interest income
Corporate interest expense
Gains (losses) on sales of investments, net
Losses on early extinguishment of debt
Equity in loss of investments and venture funds

Total other income (expense)

Percentage not meaningful.

Variance

Year Ended December 31,

2010 vs. 2009

2010

2009

Amount

Variance

$
6.2
(167.1)
2.7
—
(0.8)

0.9
(282.7)
(1.7)
(1,018.9)
(8.6)

5.3
115.6
4.4
1,018.9
7.8

$(159.0)

$(1,311.0) $1,152.0

620%
(41)%
*
*
(91)%

(88)%

Total other income (expense) for the year ended December 31, 2010 primarily consisted of corporate interest
expense resulting from our interest-bearing corporate debt. Corporate interest expense decreased 41% to $167.1
million for the year ended December 31, 2010 compared to 2009. This was due to the reduction in interest-bearing debt
in connection with our Debt Exchange in 2009. The losses on early extinguishment of debt of $1.0 billion for the year
ended December 31, 2009 were related primarily to the Debt Exchange. The loss on the Debt Exchange resulted from
de-recognition of the debt that was exchanged and the corresponding recognition of the newly-issued non-interest-
bearing convertible debentures at fair value. Corporate interest income increased to $6.2 million for the year ended
December 31, 2010 when compared to 2009 due to a benefit of $6.0 million in connection with a legal settlement.

Income Tax Expense (Benefit)

Income tax expense was $25.3 million for the year ended December 31, 2010 compared to a benefit of
$537.7 million in 2009. Our effective tax rate was 806.3% for the year ended December 31, 2010 compared to
(29.3)% in 2009. The effective tax rate for the year ended December 31, 2010 was higher than in 2009 for two
reasons: 1) our pre-tax loss included items not deductible for tax purposes, predominantly about one-third of the
interest expense on the 2017 Notes; and 2) our reported pre-tax loss is relatively close to breakeven for the year
ended December 31, 2010. As a result, our income subject to taxation was higher, resulting in an unusually high
effective tax rate for the year ended December 31, 2010.

Valuation Allowance

During the year ended December 31, 2010, we did not maintain a valuation allowance against federal
deferred tax assets as we believed that it was more likely than not that all of these assets will be realized. Our
evaluation focused on identifying significant, objective evidence that we would be able to realize our deferred tax
assets in the future. Our analysis of the need for a valuation allowance recognized that we were in a cumulative
book loss position as of the three-year period ended December 31, 2010, which is considered significant and
objective evidence that we may not be able to realize some portion of our deferred tax assets in the future.
However, we believed we were able to rely on our forecasts of future taxable income and overcome the
uncertainty created by the cumulative loss position.

SEGMENT RESULTS REVIEW

We report operating results in two segments: 1) trading and investing; and 2) balance sheet management.
Trading and investing includes retail brokerage products and services; investor-focused banking products; market
making; and corporate services. Balance sheet management includes the management of asset allocation and
credit, liquidity and interest rate risk; loans previously originated or purchased from third parties; and customer
cash and deposits. Costs associated with certain functions that are centrally-managed are separately reported in a
corporate/other category. For more information on our segments, see Note 22—Segment Information in Item 8.
Financial Statements and Supplementary Data beginning on page 161.

Trading and Investing

The following table summarizes trading and investing financial information and key metrics as of and for

the years ended December 31, 2011, 2010 and 2009 (dollars in millions, except for key metrics):

Net operating interest income
Commissions
Fees and service charges
Principal transactions
Other revenues

Total net revenue
Total operating expense

Year Ended December 31,

Variance

2011 vs. 2010

2011

2010

2009

Amount %

746.1
436.2
128.0
105.4
31.2

763.0
431.0
139.1
103.4
37.9

699.6
548.0
185.6
88.1
35.5

$ (16.9)
5.2
(11.1)
2.0
(6.7)

(2)%
1%
(8)%
2%
(18)%

1,446.9
825.9

1,474.4
752.6

1,556.8
796.6

(27.5)
73.3

(2)%
10%

Trading and investing income

621.0

721.8

760.2

$ (100.8)

(14)%

Key Metrics:
DARTs
Average commission per trade
Margin receivables (dollars in billions)
End of period brokerage accounts
Net new brokerage accounts
Customer assets (dollars in billions)
Net new brokerage assets (dollars in billions)
Brokerage related cash (dollars in billions)

Percentage not meaningful.

157,475
11.01
4.8
2,783,012
98,701
172.4
9.7
27.7

$
$

$
$
$

150,532
11.21
5.1
2,684,311
54,232
176.2
8.1
24.5

$
$

$
$
$

179,183
11.33
3.7
2,630,079
114,273
150.5
7.2
20.4

$
$

$
$
$

6,943
$ (0.20)
(0.3)
$
98,701
44,469
(3.8)
1.6
3.2

$
$
$

5%
(2)%
(6)%
4%
*
(2)%
*
13%

The trading and investing segment generates revenue from brokerage and banking relationships with
investors and from market making and corporate services activities. This segment generates five main sources of
revenue: net operating interest income; commissions; fees and service charges; principal transactions; and other
revenues. Other
revenues include results from providing software and services for managing equity
compensation plans from corporate customers, as we ultimately service retail investors through these corporate
relationships.

2011 Compared to 2010

Trading and investing income decreased 14% to $621.0 million for the year ended December 31, 2011
compared to 2010. We continued to generate net new brokerage accounts, ending the year with 2.8 million
accounts. Our brokerage related cash, which is one of our most profitable sources of funding, increased by $3.2
billion when compared to 2010.

Trading and investing commissions increased 1% to $436.2 million for the year ended December 31, 2011
compared to 2010. This increase in commissions was primarily the result of an increase in DARTs of 5% to
157,475 for the year ended December 31, 2011 compared to 2010.

Trading and investing fees and service charges decreased 8% to $128.0 million for the year ended
December 31, 2011 compared to 2010. This decrease for the year ended December 31, 2011 was driven primarily
by the elimination of all account activity fees, which took effect in the second quarter of 2010.

Trading and investing principal

the year ended
December 31, 2011 compared to 2010. The increase in principal transactions revenue was driven by a favorable
mix of trading volume and revenue earned per share, as well as a continued focus on expanding our external
customer base, when compared to 2010.

transactions increased 2% to $105.4 million for

Trading and investing operating expense increased 10% to $825.9 million for the year ended December 31,
2011 compared to 2010. The increase for the year ended December 31, 2011 was driven primarily by a reserve of
$48 million related to an offer to purchase auction rate securities held by customers of E*TRADE Securities
LLC, as well as former customers who purchased auction rate securities through E*TRADE Securities LLC. This
reserve relates primarily to our estimate of the securities’ current fair value relative to their par value and
includes penalties and other estimated settlement costs. In addition, compensation and benefits expense increased
8% to $245.8 million as a result of increasing our financial consultants by 42%.

As of December 31, 2011, we had approximately 2.8 million brokerage accounts, 1.1 million stock plan
accounts and 0.5 million banking accounts. For the years ended December 31, 2011 and 2010, our brokerage
products contributed 69% and 67%, respectively, and our banking products contributed 31% and 33%,
respectively, of total trading and investing net revenue.

2010 Compared to 2009

Trading and investing segment income decreased 5% to $721.8 million for the year ended December 31,
2010 compared to 2009. We generated new brokerage accounts, ending the year with 2.7 million accounts. Our
brokerage related cash increased by $4.1 billion when compared to 2009.

Trading and investing net operating interest income increased 9% to $763.0 million for the year ended
December 31, 2010 compared to 2009. This increase was driven primarily by a decrease in yields paid on
customer deposits and an increase in the average balance of margin receivables during the period.

Trading and investing commissions decreased 21% to $431.0 million for the year ended December 31, 2010
compared to 2009. The decrease in commissions was primarily the result of a decrease in DARTs of 16% to
150,532 and a decrease in the average commission per trade of 1% to $11.21 for the year ended December 31,
2010 compared to 2009. The slight decrease in the average commission per trade was due primarily to the
elimination of the $12.99 commission tier and the per share commission applied to market trades larger than
2,000 shares, which became effective in the second quarter of 2010, partially offset by an improvement in the
product and customer mix when compared to the same period in 2009.

Trading and investing fees and service charges decreased 25% to $139.1 million for the year ended
December 31, 2010 compared to 2009. The decreases were primarily due to lower order flow revenue and the
elimination of all account activity fees, which became effective in the second quarter of 2010.

Trading and investing principal

transactions increased 17% to $103.4 million for the year ended
December 31, 2010 compared to 2009. The increase in principal transactions was driven by an increase in the
volume of equity shares that were traded, which was partially offset by a decrease in our average revenue earned
per share traded for the year ended December 31, 2010.

Trading and investing operating expense decreased 6% to $752.6 million for the year ended December 31,
2010 compared to 2009. The decrease related primarily to decreases in compensation and benefits, clearing and
servicing, and communications expenses, which were partially offset by increases in advertising and market
development expense and professional services.

As of December 31, 2010, we had approximately 2.7 million brokerage accounts, 1.0 million stock plan
accounts and 0.5 million banking accounts. For the years ended December 31, 2010 and 2009, our brokerage
products contributed 67% and 77%, respectively, and our banking products, which include sweep products,
contributed 33% and 23%, respectively, of total trading and investing net revenue.

Balance Sheet Management

The following table summarizes balance sheet management financial information and key metrics as of and

for the years ended December 31, 2011, 2010 and 2009 (dollars in millions):

Year Ended December 31,

2011 vs. 2010

2011

2010

2009

Amount

Variance

Net operating interest income
Fees and service charges
Gains on loans and securities, net
Net impairment
Other revenues

Total net revenue
Provision for loan losses
Total operating expense
Losses from early extinguishment of debt

$473.9
2.4
121.2
(14.9)
7.2

$ 463.3
3.2
166.3
(37.7)
8.4

560.9
6.9
169.2
(89.1)
12.3

$ 10.6
(0.8)
(45.1)
22.8
(1.2)

589.8
440.6
238.4
—

603.5
779.4
215.5
—

660.2
1,498.1
244.1
(50.6)

(13.7)
(338.8)
22.9
—

Balance sheet management loss

$ (89.2) $ (391.4) $(1,132.6) $ 302.2

2%
(24)%
(27)%
(60)%
(14)%

(2)%
(43)%
11%
*

(77)%

Key Metrics:

Special mention loan delinquencies
Allowance for loan losses
Allowance for loan losses as a % of gross loans

receivable

Percentage not meaningful.

$467.1
$822.8

$ 589.4 $
$1,031.2

804.5
$ 1,182.7

$(122.3)
$(208.4)

(21)%
(20)%

6.25%

6.38%

5.81% *

(0.13)%

The balance sheet management segment generates revenue from managing loans previously originated or
purchased from third parties as well as customer cash and deposit relationships to generate additional net
operating interest income.

2011 Compared to 2010

The balance sheet management segment reported a loss of $89.2 million for the year ended December 31,
2011. The losses in the segment are due primarily to the provision for loan losses of $440.6 million for the year
ended December 31, 2011.

Gains on loans and securities, net were $121.2 million for the year ended December 31, 2011 compared to
$166.3 million in 2010. The decrease in gains on loans and securities, net was primarily due to more trading
volatility in the markets in 2010 when compared to 2011.

We recognized $14.9 million of net impairment during the year ended December 31, 2011 on certain
securities in the non-agency CMO portfolio due to continued deterioration in the expected credit performance of
the underlying loans in those specific securities. The net impairment included gross OTTI of $9.2 million for the
year ended December 31, 2011. The amount that had been previously recorded through other comprehensive
income and was reclassified into earnings during the year ended December 31, 2011 was $5.7 million.

Total balance sheet management operating expense increased 11% to $238.4 million for the year ended
December 31, 2011 compared to 2010. The increase in operating expense for the year ended December 31, 2011
was due primarily to increased FDIC insurance premiums as a result of an industry wide change in the FDIC
insurance premium assessment calculation, effective in the second quarter of 2011.

2010 Compared to 2009

The balance sheet management segment reported a loss of $391.4 million for the year ended December 31,
2010. The losses in this segment were due primarily to the provision for loan losses of $779.4 million for the year
ended December 31, 2010.

Gains on loans and securities, net were gains of $166.3 million and $169.2 million for the years ended
December 31, 2010 and 2009, respectively. The gains on loans and securities, net for the year ended
December 31, 2010 were due primarily to gains on the sale of certain agency mortgage-backed securities and
agency debentures.

We recognized $37.7 million and $89.1 million of net impairment during the years ended December 31,
2010 and 2009, respectively, on certain securities in our non-agency CMO portfolio due to continued
deterioration in the expected credit performance of the underlying loans in the securities. The net impairment
included gross OTTI of $41.5 million and $232.1 million for the years ended December 31, 2010 and 2009,
respectively. Of the gross OTTI for the years ended December 31, 2010 and 2009, $3.8 million and $143.0
million related to the noncredit portion of OTTI, which was recorded through other comprehensive income (loss).

Provision for loan losses decreased 48% to $779.4 million for the year ended December 31, 2010 compared
to 2009. The decrease in the provision for loan losses was driven by lower levels of delinquent loans in our one-
to four- family and home equity loan portfolios.

Total balance sheet management operating expense decreased 12% to $215.5 million for the year ended
December 31, 2010 compared to 2009. The decrease for the year ended December 31, 2010 was due to decreases
in clearing and servicing expense, FDIC insurance premiums and other expense. The decrease in the FDIC
insurance premiums for the year ended December 31, 2010 was a result of an industry wide assessment that
resulted in an additional $21.6 million of expense in the second quarter of 2009. There were no similar
assessments made during the year ended December 31, 2010.

Corporate/Other

The following table summarizes corporate/other financial information for the years ended December 31,

2011, 2010 and 2009 (dollars in millions):

Total net revenue

Compensation and benefits
Professional services
Occupancy and equipment
Communications
Depreciation and amortization
Facility restructuring and
other exit activities
Other operating expenses

Total operating expense

Operating loss
Total other income (expense)

Corporate/other loss

Percentage not meaningful.

Variance

Year Ended December 31,

2011 vs. 2010

2011

2010

2009

Amount %

(0.1) $

(0.0) $ — $ (0.1)

70.3
35.4
2.7
1.5
18.4

7.7
34.5

80.2
28.9
2.6
1.7
21.0

14.3
25.8

170.5

174.5

93.7
42.7
3.4
1.9
19.1

20.7
21.2

202.7

(9.9)
6.5
0.1
(0.2)
(2.6)

(6.6)
8.7

(4.0)

(170.6)
(175.8)

(174.5)
(159.0)

(202.7)
(1,260.4)

3.9
(16.8)

(12)%
23%
4%
(11)%
(12)%

*
34%

(2)%

(2)%
11%

$(346.4) $(333.5) $(1,463.1) $(12.9)

The corporate/other category includes costs that are centrally-managed, technology related costs incurred to
support centrally-managed functions, restructuring and other exit activities, corporate debt and corporate
investments.

2011 Compared to 2010

The corporate/other loss before income taxes was $346.4 million for the year ended December 31, 2011,
compared to $333.5 million in 2010. Compensation and benefits decreased 12% to $70.3 million due primarily to
a decrease in incentive compensation during the year ended December 31, 2011 compared to 2010. The increase
in professional services was due primarily to a $6.0 million credit in connection with a legal settlement in the
third quarter of 2010, which decreased professional services for the year ended December 31, 2010. Other
operating expenses increased 34% to $34.5 million primarily due to the recording of a net reserve of $10.8
million related a memorandum of understanding that was entered into to settle the Freudenberg Action during the
year ended December 31, 2011.

Total other income (expense) consisted primarily of $177.8 million in corporate interest expense for the year
ended December 31, 2011 on interest-bearing corporate debt. In addition to the stated interest on corporate debt,
the corporate interest expense line item included the benefit of discontinued fair value hedges on corporate debt,
which decreased $7.8 million for the year ended December 31, 2011 compared to 2010. Offsetting interest
expense for the year ended December 31, 2011 was a $3.1 million gain on early extinguishment of debt related to
the call of the 2013 Notes in the second quarter of 2011.

2010 Compared to 2009

The corporate/other loss was $333.5 million for the year ended December 31, 2010, compared to $1.5
billion for the same period in 2009. The loss for the year ended December 31, 2010 was due to total operating
expenses of $174.5 million and other expense of $159.0 million. Total other income (expense) primarily

consisted of corporate interest expense of $167.1 million resulting from our interest-bearing corporate debt.
Corporate interest expense decreased 41% to $167.1 million for the year ended December 31, 2010 due to the
reduction in interest-bearing debt in connection with our Debt Exchange in the third quarter of 2009. The loss for
the year ended December 31, 2009 was due primarily to the $968.3 million pre-tax non-cash loss on
extinguishment of debt related to the Debt Exchange, which is reported in the total other income (expense) line
item.

BALANCE SHEET OVERVIEW

The following table sets forth the significant components of our consolidated balance sheet (dollars in

millions):

Assets:

December 31,

Variance

2011 vs. 2010

2011

2010

Amount

Cash and equivalents
Cash and investments required to be segregated under federal or

$ 2,099.8

$ 2,374.3

$ (274.5)

(12)%

other regulations

Securities(1)
Margin receivables
Loans receivable, net
Investment in FHLB stock
Other(2)

Total assets

Liabilities and shareholders’ equity:

Deposits
Wholesale borrowings(3)
Customer payables
Corporate debt
Other liabilities

Total liabilities
Shareholders’ equity

1,275.6
21,785.4
4,826.3
12,332.8
140.2
5,480.4

609.5
17,330.6
5,120.6
15,121.9
164.4
5,651.7

666.1 109%
26%
(6)%
(18)%
(15)%
(3)%

4,454.8
(294.3)
(2,789.1)
(24.2)
(171.3)

$47,940.5

$46,373.0

$ 1,567.5

$26,460.0
7,752.4
5,590.9
1,493.5
1,715.7

$25,240.3
8,620.0
5,020.1
2,145.9
1,294.3

$ 1,219.7
(867.6)
570.8
(652.4)
421.4

43,012.5
4,928.0

42,320.6
4,052.4

691.9
875.6

5%
(10)%
11%
(30)%
33%

2%
22%

Total liabilities and shareholders’ equity

$47,940.5

$46,373.0

$ 1,567.5

(1)

(2)

(3)

Includes balance sheet line items trading, available-for-sale and held-to-maturity securities.
Includes balance sheet line items property and equipment, net, goodwill, other intangibles, net and other assets.
Includes balance sheet line items securities sold under agreements to repurchase and FHLB advances and other borrowings.

Cash and Investments Required to be Segregated under Federal or Other Regulations

The level of cash and investments required to be segregated under federal or other regulations, or segregated
cash and investments, is driven largely by the amount of customer payables we hold as a liability in excess of the
amount of margin receivables we hold as an asset. This difference represents excess customer cash that we are
required by our regulators to segregate in a cash account for the exclusive benefit of our brokerage customers.
Segregated cash and investments increased by $0.7 billion during the year ended December 31, 2011. This
increase was driven primarily by an increase in customer payables of $0.6 billion during the year ended
December 31, 2011.

Securities

Trading, available-for-sale and held-to-maturity securities are summarized as follows (dollars in millions):

Trading securities

Available-for-sale securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and

CMOs

Non-agency CMOs

Total residential mortgage-backed

securities
Investment securities

December 31,

Variance

2011 vs. 2010

2011

2010

Amount

54.4

62.2

(7.8)

(13)%

$13,965.7
341.6

$12,898.1
395.4

$1,067.6
(53.8)

8%
(14)%

14,307.3
1,344.2

13,293.5
1,512.2

1,013.8
(168.0)

8%
(11)%

Total available-for-sale securities

$15,651.5

$14,805.7

$ 845.8

Held-to-maturity securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and

CMOs
Investment securities

$ 5,296.5
783.0

$ 1,928.6
534.1

$3,367.9
248.9

Total held-to-maturity securities

$ 6,079.5

$ 2,462.7

$3,616.8

175%
47%

147%

Total securities

$21,785.4

$17,330.6

$4,454.8

26%

Securities represented 45% and 37% of total assets at December 31, 2011 and 2010, respectively. The
increase in available-for-sale securities was due primarily to an increase of $1.1 billion in agency mortgage-
backed securities and CMOs, partially offset by the sale or call of agency debentures.

Loans Receivable, Net

Loans receivable, net are summarized as follows (dollars in millions):

One- to four-family
Home equity
Consumer and other
Unamortized premiums, net
Allowance for loan losses

Total loans receivable, net

December 31,

Variance

2011 vs. 2010

2011

2010

Amount

$ 6,615.8
5,328.7
1,113.2
97.9
(822.8)

$ 8,170.3
6,410.3
1,443.4
129.1
(1,031.2)

$(1,554.5)
(1,081.6)
(330.2)
(31.2)
208.4

(19)%
(17)%
(23)%
(24)%
(20)%

$12,332.8

$15,121.9

$(2,789.1)

(18)%

Loans receivable, net decreased 18% to $12.3 billion at December 31, 2011 from $15.1 billion at
December 31, 2010. This decline was due primarily to our strategy of reducing balance sheet risk by allowing the
loan portfolio to pay down, which we plan to do for the foreseeable future.

Deposits

Deposits are summarized as follows (dollars in millions):

Variance

December 31,

2011 vs. 2010

2011

2010

Amount %

Sweep deposits
Complete savings deposits
Other money market and savings deposits
Checking deposits
Certificates of deposit
Brokered certificates of deposit

Total deposits

$18,619.0 $16,139.6 $2,479.4

5,720.8
1,033.2
863.3
190.5
33.2

6,683.6
1,092.9
825.6
407.1
91.5

15%
(962.8) (14)%
(5)%
(59.7)
5%
37.7
(216.6) (53)%
(58.3) (64)%
5%

$26,460.0 $25,240.3 $1,219.7

Deposits represented 62% and 60% of total liabilities at December 31, 2011 and 2010, respectively. At
December 31, 2011, 93% of our customer deposits were covered by FDIC insurance. Deposits generally provide the
benefit of lower interest costs compared with wholesale funding alternatives. Deposits increased 5% to $26.5 billion
at December 31, 2011 from $25.2 billion at December 31, 2010. The increase was due primarily to an increase of
$2.5 billion in sweep deposits, partially offset by a decrease of $1.0 billion in complete savings deposits.

The deposits balance is a component of the total customer cash and deposits balance reported as a customer
activity metric of $35.5 billion and $33.5 billion at December 31, 2011 and 2010, respectively. The total
customer cash and deposits balance is summarized as follows (dollars in millions):

Variance

December 31,

2011 vs. 2010

2011

2010

Amount %

Deposits
Less: brokered certificates of deposit
Retail deposits
Customer payables
Customer cash balances held by third parties and other

Total customer cash and deposits

$26,460.0 $25,240.3 $1,219.7

(33.2)
26,426.8
5,590.9
3,520.1

1,278.0
570.8
156.3
$35,537.8 $33,532.7 $2,005.1

(91.5)
25,148.8
5,020.1
3,363.8

5%
58.3 (64)%
5%
11%
5%
6%

Wholesale Borrowings

Wholesale borrowings, which consist of securities sold under agreements to repurchase and FHLB advances

and other borrowings, are summarized as follows (dollars in millions):

December 31,

Variance

2011 vs. 2010

2011

2010

Amount

Securities sold under agreements to repurchase

$5,015.5

$5,888.3

$(872.8)

(15)%

FHLB advances
Subordinated debentures
Other

Total FHLB advances and other borrowings

$2,302.7
427.6
6.6
$2,736.9

$2,284.1
427.5
20.1
$2,731.7

$ 18.6
0.1
(13.5)
5.2

1%
0%
(67)%
0%

Total wholesale borrowings

$7,752.4

$8,620.0

$(867.6)

(10)%

Wholesale borrowings represented 18% and 20% of total liabilities at December 31, 2011 and 2010,
respectively. Securities sold under agreements to repurchase and FHLB advances are the primary wholesale
funding sources of the Bank. As a result, we expect these balances to fluctuate over time as deposits and interest-

earning assets fluctuate. The decrease in securities sold under agreements to repurchase of $0.9 billion during the
year ended December 31, 2011 was due to a planned decrease in the forecasted issuance of debt. We anticipate
further decreases in securities sold under agreements to repurchase of approximately $300 million during the
second quarter of 2012 and $150 million during the fourth quarter of 2012.

Corporate Debt

Corporate debt by type is shown as follows (dollars in millions):

December 31, 2011
Interest-bearing notes:

7 7⁄ 8% Notes, due 2015
6 3⁄4% Notes, due 2016
12 1⁄ 2% Springing lien notes, due 2017
Total interest-bearing notes

Non-interest-bearing debt:

0% Convertible debentures, due 2019

Total corporate debt

December 31, 2010
Interest-bearing notes:

8% Notes, due 2011
7 3⁄ 8% Notes, due 2013
7 7⁄ 8% Notes, due 2015
12 1⁄ 2% Springing lien notes, due 2017
Total interest-bearing notes

Non-interest-bearing debt:

0% Convertible debentures, due 2019

Total corporate debt

Face Value Discount

Fair Value Hedge
Adjustment

Net

$ 243.2 $
435.0
930.2

(1.2)
(7.4)
(162.9)

1,608.4

(171.5)

$ 7.4
—
6.2

13.6

$ 249.4
427.6
773.5

1,450.5

43.0

—

43.0

$1,651.4 $(171.5)

$13.6

$1,493.5

Face Value Discount

Fair Value Hedge
Adjustment

Net

3.6 $ —

414.7
243.2
930.2

(2.5)
(1.5)
(177.5)

1,591.7

(181.5)

$ —
15.1
9.3
7.3

31.7

3.6
427.3
251.0
760.0

1,441.9

704.0

—

704.0

$2,295.7 $(181.5)

$31.7

$2,145.9

Corporate debt decreased 30% to $1.5 billion at December 31, 2011 from $2.1 billion at December 31,
2010. The decline was due to the conversion of approximately $661 million in convertible debentures into
63.9 million shares of common stock during the year ended December 31, 2011. The remaining face value of the
convertible debentures as of December 31, 2011 was $43.0 million.

During the second of quarter of 2011, we issued an aggregate principal amount of $435 million in 2016
Notes. We used the proceeds from the 2016 Notes to redeem all of the outstanding 2013 Notes, including paying
the associated redemption premium, accrued interest and related fees and expenses.

Shareholders’ Equity

The activity in shareholders’ equity during the year ended December 31, 2011 is summarized as follows

(dollars in millions):

Common Stock /
Additional Paid-In
Capital

Accumulated Deficit /
Other
Comprehensive Loss

Total

Beginning balance, December 31, 2010

Net income
Conversions of convertible debentures
Net change from available-for-sale securities
Net change from cash flow hedging instruments
Other(1)

$6,642.9

—
660.9
—
—
5.9

$(2,590.5)
156.7
—
199.7
(149.4)
1.8

$4,052.4
156.7
660.9
199.7
(149.4)
7.7

Ending balance, December 31, 2011

$7,309.7

$(2,381.7)

$4,928.0

(1) Other includes employee share-based compensation accounting and changes in accumulated other comprehensive loss from foreign

currency translation.

Shareholders’ equity increased 22% to $4.9 billion at December 31, 2011 from $4.1 billion at December 31,
2010. This increase was due primarily to the conversion of $660.9 million in convertible debentures into
63.9 million shares of common stock during the year ended December 31, 2011.

LIQUIDITY AND CAPITAL RESOURCES

We have established liquidity and capital policies to support the successful execution of our business
strategies, while ensuring ongoing and sufficient
liquidity through the business cycle. These policies are
especially important during periods of stress in the financial markets, which have been ongoing since the fourth
quarter of 2007 and could continue for some time.

We believe liquidity is of critical importance to the Company and especially important within E*TRADE
Bank. The objective of our policies is to ensure that we can meet our corporate and banking liquidity needs under
both normal operating conditions and under periods of stress in the financial markets. Our corporate liquidity
needs are primarily driven by the amount of principal and interest due on our corporate debt as well as any
capital needs at E*TRADE Bank. Our banking liquidity needs are driven primarily by the level and volatility of
our customer deposits. Management maintains an extensive set of liquidity sources and monitors certain business
trends and market metrics closely in an effort to ensure we have sufficient liquidity and to avoid dependence on
other more expensive sources of funding. Management believes the following sources of liquidity are of critical
importance in maintaining ample funding for liquidity needs: Corporate cash, Bank cash, deposits and unused
FHLB borrowing capacity. Management believes that within deposits, sweep deposits are of particular
importance as they are the most stable source of liquidity for E*TRADE Bank when compared to non-sweep
deposits. Overall, management believes that these liquidity sources, which we expect to fluctuate in any given
period, are more than sufficient to meet our needs for the foreseeable future.

Capital is generated primarily through our business operations and our capital market activities. The primary
business operations of both the trading and investing and balance sheet management segments are contained
within E*TRADE Bank; therefore, we believe a key indicator of the capital generated or used in our business
operations is the level of regulatory capital in E*TRADE Bank. During the year ended December 31, 2011,
E*TRADE Bank generated an additional $411 million of risk-based capital and $228 million of Tier I capital in

excess of the level our regulators define as well-capitalized. The continued generation of additional risk-based
and Tier I capital is a positive indicator that the regulatory capital in E*TRADE Bank is sufficient to meet its
operating needs.

Consolidated Cash and Equivalents

The consolidated cash and equivalents balance decreased by $0.3 billion to $2.1 billion for the year ended
December 31, 2011. The majority of this balance is cash held in regulated subsidiaries, primarily the Bank,
outlined as follows (dollars in millions):

Corporate cash
Bank cash
International brokerage and other cash

Total consolidated cash

December 31,

Variance

2011

2010

2011 vs. 2010

$ 484.4
1,574.1
41.3

$ 470.5
1,812.1
91.7

$ 13.9
(238.0)
(50.4)

$2,099.8

$2,374.3

$(274.5)

Corporate cash is the primary source of liquidity at the parent company. We define corporate cash as cash held
at the parent company as well as cash held in certain subsidiaries that can distribute cash to the parent company
without any regulatory approval. We believe corporate cash is a useful measure of the parent company’s liquidity as
it is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. Corporate
cash can fluctuate in any given quarter and is impacted primarily by tax settlements, approval and timing of
subsidiary dividends, debt service costs and other overhead cost sharing arrangements. We target corporate cash to
be two times our annual debt service, or approximately $330 million. From the level of corporate cash at
December 31, 2011, we expect that it will decline generally in line with our corporate interest expense. However,
the parent company has approximately $0.5 billion in deferred tax assets, which will ultimately become sources of
corporate cash as the parent’s subsidiaries reimburse the parent for the use of its deferred tax assets.

Liquidity Available from Subsidiaries

Liquidity available to the Company from its subsidiaries is limited by regulatory requirements. In addition,
neither E*TRADE Bank nor its subsidiaries may pay dividends to the parent company without approval from its
regulators. 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 Bank is subject to capital requirements determined by its regulator. At December 31, 2011 and
2010, E*TRADE Bank had $1.2 billion and $1.0 billion, respectively, of Tier I capital in excess of the regulatory
minimum level required to be considered “well capitalized.” Since late 2009, the Company has requested and
received the approval of its primary regulators to send quarterly dividends from E*TRADE Bank to the parent. The
dividend had been equal to profits from the previous quarter of E*TRADE Securities LLC. We believe our former
regulator, the OTS, viewed these dividend requests as distinct from a more comprehensive request to release a
portion of E*TRADE Bank’s excess capital. During the third quarter of 2011, the Company transitioned regulators
from the OTS to the OCC and the Federal Reserve. We believe our new regulators would subject all dividend
requests to an equal level of scrutiny; therefore, rather than request a dividend from E*TRADE Bank in an amount
equal to the profits of E*TRADE Securities LLC in the prior quarter, we believe the best path for the Company’s
shareholders is to work on a comprehensive dividend plan that efficiently distributes capital among our regulated
entities and parent company. The Company is in dialogue with the regulators regarding our ability to implement a
comprehensive dividend plan and expects to complete that dialogue by the end of 2012. Following the completion
of that dialogue, we expect to have a better understanding of the timing of any future dividends; however, we cannot
predict the likelihood or the timing of regulatory approval for any such dividends.

The Company’s broker-dealer subsidiaries are subject to capital requirements determined by their respective
regulators. At December 31, 2011 and 2010, all of our brokerage subsidiaries met their minimum net capital

requirements. Our broker-dealer subsidiaries had excess net capital of $675.1 million(1) at December 31, 2011, an
increase of $25.9 million from $649.2 million at December 31, 2010. While we cannot assure that we would
obtain regulatory approval in the future to withdraw any of this excess net capital, $517.6 million is available for
dividend while still maintaining a capital level above regulatory “early warning” guidelines.

Financial Regulatory Reform Legislation and Basel III Accords

Under the Dodd-Frank Act, our primary regulator, the OTS, was abolished during July 2011 and its functions and
personnel distributed among the OCC, the FDIC and the Federal Reserve. Although the Dodd-Frank Act maintains the
federal thrift charter, it eliminates certain benefits of the charter and imposes new penalties for failure to comply with
the qualified thrift lender test. The Dodd-Frank Act also requires all companies, including savings and loan holding

The implementation of holding company capital requirements will impact us as the parent company was not
previously subject to capital requirements. These requirements are expected to become effective within the next four
years. We believe the requirements are an important measure of our capital strength and we have begun to track these
ratios, using the current capital ratios that apply to bank holding companies, as we plan for this future requirement. The
Tier I leverage, Tier I risk-based capital and total risk-based capital ratios are non-GAAP measures as the holding
company is not yet held to these capital requirements and are calculated as follows (dollars in millions):

Shareholders’ equity
Deduct:

Losses in other comprehensive income on available-for-sale debt securities and cash flow

hedges, net of tax

Goodwill and other intangible assets, net of deferred tax liabilities

Add:

Qualifying restricted core capital elements

Subtotal

Deduct:

Disallowed servicing assets and deferred tax assets

Tier I capital

Add:

Allowable allowance for loan losses

Total capital

Total average assets
Deduct:

Goodwill and other intangible assets, net of deferred tax liabilities

Subtotal

Deduct:

Disallowed servicing assets and deferred tax assets

Average total assets for leverage capital purposes

Total risk-weighted assets (1)

December 31,

2011

2010

$ 4,928.0

$ 4,052.4

(389.6)
1,947.5

(439.9)
2,046.4

433.0

3,803.1

2,878.9

1,331.0

2,472.1

1,351.3

1,527.6

277.6

295.6

$ 2,749.7

$ 1,823.2

$46,964.2

$46,043.4

1,947.5

2,046.4

45,016.7

43,997.0

1,331.0

1,351.3

$43,685.7

$42,645.7

$21,668.1

$22,915.8

Tier I leverage ratio (Tier I capital / Average total assets for leverage capital purposes)
Tier I capital / Total risk-weighted assets
Total capital / Total risk-weighted assets

5.7%
11.4%
12.7%

3.6%
6.7%
8.0%

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

(1)

The excess net capital of the broker-dealer subsidiaries at December 31, 2011 included $483.0 million and $145.2 million of excess net
capital at E*TRADE Clearing LLC and E*TRADE Securities LLC, respectively, which are subsidiaries of E*TRADE Bank and are also
included in the excess risk-based capital of E*TRADE Bank. companies, that directly or indirectly control an insured depository
institution to serve as a source of strength for the institution.

During the year ended December 31, 2011, $660.9 million in convertible debentures were converted into
63.9 million shares of common stock, which improved our holding company ratios. The increase to capital as a
result of these additional conversions raised our estimated holding company capital ratios to exceed the “well
capitalized” minimums under current bank holding company guidelines. As of December 31, 2011, the parent
company Tier I leverage ratio was approximately 5.7% compared to the minimum ratio required to be “well
capitalized” of 5%, the Tier I risk-based capital ratio was approximately 11.4% compared to the minimum ratio
required to be “well capitalized” of 6%, and the total risk-based capital ratio was approximately 12.7% compared
to the minimum ratio required to be “well capitalized” of 10%.

Our Tier I common ratio, which is a non-GAAP measure and currently has no mandated minimum or “well
capitalized” standard, was 9.4% as of December 31, 2011. We believe this ratio is an important measure of our
capital strength. The Tier I common ratio is defined as the Tier I capital less elements of Tier I capital that are not
in the form of common equity, such as trust preferred securities, divided by total risk-weighted assets. The
following table shows the calculation of Tier I common ratio (dollars in millions):

Shareholders’ equity
Deduct:

Losses in other comprehensive income on available-for-sale debt securities and

cash flow hedges, net of tax

Goodwill and other intangible assets, net of deferred tax liabilities

Subtotal

Deduct:

Disallowed servicing assets and deferred tax assets

Tier I common

Total risk-weighted assets
Tier I common ratio (Tier I common / Total risk-weighted assets)

December 31,

2011

2010

$ 4,928.0

$ 4,052.4

(389.6)
1,947.5

(439.9)
2,046.4

3,370.1

2,445.9

1,331.0

1,351.3

$ 2,039.1

$ 1,094.6

$21,668.1

$22,915.8

9.4%

4.8%

The full impact of the Basel III Accords on the regulatory requirements to which we will be subject will
remain unknown for at least some time until implementing capital regulations are proposed and adopted for U.S.
institutions. We will continue to monitor the ongoing rule-making process to assess both the timing and the
impact of the Dodd-Frank Act and Basel III Accords on our business.

Other Sources of Liquidity

We also maintain $350 million in uncommitted financing to meet margin lending needs. At December 31,

2011, there were no outstanding balances and the full $350 million was available.

We rely on borrowed funds, from sources such as securities sold under agreements to repurchase and FHLB
advances, to provide liquidity for E*TRADE Bank. Our ability to borrow these funds is dependent upon the
continued availability of funding in the wholesale borrowings market. In addition, we can also borrow from the
Federal Reserve Bank’s discount window to meet short-term liquidity requirements, although it is not viewed as
the primary source of funding. At December 31, 2011, E*TRADE Bank had approximately $2.7 billion and $1.4
billion in additional collateralized borrowing capacity with the FHLB and Federal Reserve Bank, respectively.
We also have the ability to generate liquidity in the form of additional deposits by raising the yield on our
customer deposit accounts.

Off-Balance Sheet Arrangements

We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet
the needs of our customers and to reduce our own exposure to interest rate risk. These arrangements include firm
commitments to extend credit and letters of credit. Additionally, we enter into guarantees and other similar
arrangements as part of transactions in the ordinary course of business. For additional information on each of
these arrangements, see Note 21—Commitments, Contingencies and Other Regulatory Matters of Item 8.
Financial Statements and Supplementary Data.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at December 31, 2011 and the effect such

obligations are expected to have on our liquidity and cash flow in future periods (dollars in millions):

Securities sold under agreements to repurchase(1)
FHLB advances and other borrowings(1)(2)
Corporate debt(3)
Uncertain tax positions
Certificates of deposit and brokered certificates of

deposit(1)(4)

Operating lease payments(5)
Purchase obligations(6)

Payments Due by Period

Less Than 1
Year

$3,218.7
910.3
164.8
10.2

1-3 Years

3-5 Years

Thereafter

Total

$1,178.3
486.4
329.6
17.1

$ 433.0
834.8
969.9
20.7

$ 302.4
1,098.4
1,079.8
341.1

$ 5,132.4
3,329.9
2,544.1
389.1

146.3
21.1
54.6

46.5
34.9
19.1

25.1
35.8
0.6

30.0
53.2
—

247.9
145.0
74.3

Total contractual obligations

$4,526.0

$2,111.9

$2,319.9

$2,904.9

$11,862.7

(1)

(2)

(3)

Includes annual interest based on the contractual features of each transaction, using market rates at December 31, 2011. Interest rates are
assumed to remain at current levels over the life of all adjustable rate instruments.
For subordinated debentures included in other borrowings, does not assume early redemption under current conversion provisions.
Includes annual interest payments. Does not assume conversion for the non-interest bearing convertible debentures due 2019.

(4) Does not include sweep deposits, complete savings deposits, other money market and savings deposits or checking deposits as there are

(5)

(6)

no stated maturity dates and /or scheduled contractual payments.
Includes facilities restructuring leases and is net of estimated future sublease income.
Includes material purchase obligations for goods and services covered by non-cancelable contracts and contracts with termination
clauses. Includes contracts through the termination date, even if the contract is renewable.

As of December 31, 2011, the Company had $0.4 billion of unused lines of credit available to customers
under home equity lines of credit and $0.3 billion of unused consumer and other lines. As of December 31, 2011,
the Company had no commitments to purchase loans. The Company had a commitment to originate and sell
mortgage loans of $140.8 million and $11.7 million, respectively. The Company had a commitment to purchase
and sell securities of $524.6 million and $192.5 million, respectively. The Company also had $6.4 million in
commitments to fund low income housing tax credit partnerships and other limited partnerships as of
December 31, 2011. Additional information related to commitments and contingent liabilities is detailed in Note
21—Commitments, Contingencies and Other Regulatory Matters of
Item 8. Financial Statements and
Supplementary Data.

Other Liquidity Matters

We do not hold any positions in sovereign debt of European countries and therefore have no direct exposure

to the concerns regarding the creditworthiness of certain sovereign governments in Europe.

RISK MANAGEMENT

As a financial services company, we are exposed to risks in every component of our business. The
identification and management of existing and potential risks are the keys to effective risk management. Our risk
management framework, principles and practices support decision-making, improve the success rate for new
initiatives and strengthen the organization. Our goal is to balance risks and rewards through effective risk
management. Risks cannot be completely eliminated; however, we do believe risks can be identified and
managed within the Company’s risk tolerance.

Our businesses expose us to the following four major categories of risk that often overlap:

• Credit Risk—the risk of loss resulting from adverse changes in the ability or willingness of a borrower

or counterparty to meet the agreed-upon terms of their financial obligations.

•

Liquidity Risk—the risk of loss resulting from the inability to meet current and future cash flow and
collateral needs.

Interest Rate Risk—the risk of loss from adverse changes in interest rates, which could cause
fluctuations in our long-term earnings or in the value of the Company’s net assets.

• Operational Risk—the risk of loss resulting from fraud, inadequate controls or the failure of the

internal controls process, third party vendor issues, processing issues and external events.

We are also subject to other risks that could impact our business, financial condition, results of operations or

cash flows in future periods. See Part I–Item 1A. Risk Factors.

We manage risk through a governance structure involving the Board of Directors, senior management and
several risk committees. We use management level risk committees to help ensure that business decisions are
executed within our desired risk profile. A variety of methodologies and measures are used to monitor, quantify,
assess and forecast risk. Measurement criteria, methodologies and calculations are reviewed periodically to
assure that risks are represented appropriately. Risks are managed and controlled under policies and related limits
that are approved by the Board of Directors and delegated to senior management.

The Finance and Risk Oversight Committee, which was established in the second quarter of 2008 and
consists of members of the Board of Directors, monitors the risk process and significant risks throughout the
Company. In addition to this committee, various enterprise risk committees and departments throughout the
Company aid in the identification and management of risks, including:

• Asset Liability Committee—The Asset Liability Committee (“ALCO”) has primary responsibility for
managing liquidity risk and interest rate risk and reviews balance sheet trends, market interest rate and
sensitivity analyses.

• Credit Risk Committee—The Credit Risk Committee monitors asset quality trends, evaluates market
conditions, reviews the adequacy of the allowance for loan losses, establishes underwriting standards,
approves large credit exposures, approves large portfolio purchases and delegates credit approval
authority.

Various departments throughout the Company aid in the identification and management of risks. These
departments include internal audit, compliance, finance, legal, treasury, credit and enterprise risk management.
Risk reporting occurs at the business or operating units and is aggregated across the Company through the
enterprise risk management process.

Credit Risk Management

Our primary sources of credit risk are our loan and securities portfolios, where risk results from extending
credit to customers and purchasing securities, respectively. The degree of credit risk associated with our loans

and securities varies based on many factors including the size of the transaction, the credit characteristics of the
borrower, features of the loan product or security, the contractual terms of the related documents and the
availability and quality of collateral. Credit risk is one of the most common risks in financial services and is one
of our most significant risks.

Credit risk is monitored by our Credit Risk Committee, whose objective is to monitor current and expected
market conditions and the associated probable impact on the Company’s credit risk. The Credit Risk Committee
establishes credit risk guidelines in accordance with the Company’s strategic objectives and existing policies.
The Credit Risk Committee reviews investment and lending activities involving credit risk to ensure consistency
with those established guidelines. These reviews involve an analysis of portfolio balances, delinquencies, losses,
recoveries, default management and collateral liquidation performance, as well as any credit risk mitigation
efforts relating to the portfolios. In addition, the Credit Risk Committee reviews and approves credit related
counterparties engaged in financial transactions with the Company.

Loss Mitigation

We have a credit management team that focuses on the mitigation of potential losses in the loan portfolio.
Through a variety of strategies, including voluntary line closures, automatically freezing lines on all delinquent
accounts, and freezing lines on loans with materially reduced home equity, we have reduced our exposure to
open home equity lines from a high of over $7 billion in 2007 to $0.4 billion as of December 31, 2011.

We also have an initiative to assess our servicing relationships and where appropriate transfer certain
mortgage loans to servicers that specialize in managing troubled assets. We believe this initiative will improve
the credit performance of the loans transferred in future periods when compared to the expected credit
performance of these same loans if they had not been transferred. These specialized servicers focus on loan
modifications and pursue trial modifications for loans that are more than 180 days delinquent. We completed a
transfer of $2.2 billion of mortgage loans during the third and fourth quarters of 2011, which resulted in a total of
$3.0 billion of our mortgage loan portfolio at servicers that specialize in managing troubled assets as of
December 31, 2011.

We also have a loan modification program that focuses on the mitigation of potential losses in the loan
portfolio. We consider modifications in which we make an economic concession to a borrower experiencing
financial difficulty a TDR. During the year ended December 31, 2011, we modified $569.8 million and $121.8
million of one- to four-family and home equity loans, respectively, in which the modification was considered a
TDR. As we transition from the OTS to the OCC, we are working to align certain policies and procedures with
the guidance from the OCC. As a result, we suspended certain modification programs that will require changes
and we expect a decrease in the volume of TDRs in 2012. 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 is then classified as current and becomes a permanent modification. There is no impact on the
allowance for loan losses for trial modifications as they were written down to the expected recovery value when
they became 180 days past due.

We also processed minor modifications on a number of loans through traditional collections actions taken in
the normal course of servicing delinquent accounts. These actions typically result in an insignificant delay in the
timing of payments; therefore, we do not consider such activities to be economic concessions to the borrowers.
As of December 31, 2011 and 2010, we had $44.7 million and $49.9 million of mortgage loans, respectively, in
which the modification was not considered a TDR due to the insignificant delay in the timing of payments.
Approximately 8% of these loans were classified as nonperforming for both of the years ended December 31,
2011 and 2010.

We continue to review the mortgage loan portfolio in order to identify loans to be repurchased by the
originator. Our review is primarily focused on identifying loans with violations of transaction representations and

warranties or material misrepresentation on the part of the seller. Any loans identified with these deficiencies are
submitted to the original seller for repurchase. Approximately $113.8 million of loans were repurchased by the
original sellers for the year ended December 31, 2011. A total of $335.5 million of loans were repurchased by the
original sellers since we actively started reviewing our purchased loan portfolio beginning in 2008.

During the years ended December 31, 2011 and 2010, we agreed to settlements with three particular
originators specific to loans sold to us by those originators. One-time payments were made to us to satisfy in full
all pending and future repurchase requests with those specific originators. We accepted these offers as we
believed the economics of these settlements were to our advantage. During the years ended December 31, 2011
and 2010 we applied $46 million and $25 million, respectively, to the allowance for loan losses, resulting in a
corresponding reduction to our net charge-offs as well as our provision for loan losses.

Underwriting Standards—Originated Loans

We provide access to real estate loans for our customers through a third party company. We structured this
arrangement to minimize our assumption of any of the typical risks commonly associated with mortgage lending.
The third party company providing this product performs all processing and underwriting of these loans. The
third party company is responsible for the credit risk associated with these loans and purchases the loans from us
shortly after the loan closes. We originated $129.7 million in loans during the year ended December 31, 2011 and
we had commitments to originate mortgage loans of $140.8 million at December 31, 2011.

Liquidity Risk Management

Liquidity risk is monitored and managed by ALCO. We have in place a comprehensive set of liquidity and
funding policies that are intended to maintain our flexibility to address liquidity events specific to us or the
market in general. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources for additional information.

Interest Rate Risk Management

Interest rate risks are monitored and managed by ALCO, including the analysis of interest sensitivity to
changes in market interest rates under various scenarios. The scenarios assume both parallel and non-parallel
shifts in the yield curve. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk for additional
information about our interest rate risks.

Operational Risk Management

Operational risks exist in most areas of the Company from clearing to customer service. While we make

every effort to protect against failures in the internal controls system, no system is completely fail proof.

Loss of company and customer assets due to fraud represents one of our most significant operational risks.
Fraud losses typically result from unauthorized use of customer and corporate funds and resources. We monitor
customer transactions and use scoring tools which prevent a significant number of fraudulent transactions on a
daily basis. However, new techniques and strategies are constantly being developed by perpetrators to commit
fraud. In order to minimize this threat, we offer our customers various security measures, including a token based
multi-factor verification system. This token creates a unique password which changes every sixty seconds and
must be used along with the customer’s self-selected password to access their account. We believe this system is
an extremely effective tool for preventing unauthorized access to a customer’s account.

The failure of a third party vendor to adequately meet its responsibilities could result in financial loss and
impact our reputation. On an annual basis, the Vendor Management group monitors our vendor relationships and
arrangements. The vendor risk identification process includes reviews of contracts, financial soundness of
providers, information security and business continuity.

CONCENTRATIONS OF CREDIT RISK

Loans

We track and review factors to predict and monitor credit risk in the mortgage loan portfolio on an ongoing
basis. These factors include: loan type, estimated current loan-to-value (“LTV”)/combined loan-to-value (“CLTV”)
ratios, delinquency history, documentation type, borrowers’ current credit scores, housing prices, loan acquisition
channel, loan vintage and geographic location of the property. In economic conditions in which housing prices
generally appreciate, we believe that loan type, LTV/CLTV ratios, documentation type and credit scores are the key
factors in determining future loan performance. In a housing market with declining home prices and less credit
available for refinance, we believe the LTV/CLTV ratio becomes a more important factor in predicting and
monitoring credit risk. The factors are updated on at least a quarterly basis. We track and review delinquency status
to predict and monitor credit risk in the consumer and other loan portfolio on an ongoing basis.

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 14% of the home equity portfolio
was in the first lien position as of December 31, 2011. We hold both the first and second lien positions in less
than 1% of the home equity loan portfolio. The home equity loan portfolio consists of home equity installment
loans and home equity lines of credit.

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. Home equity lines of credit convert to amortizing loans at the end of
the draw period, which ranges from 60 months to 120 months. At December 31, 2011, the vast majority of the
home equity line of credit portfolio had not converted from the interest-only draw period to an amortizing loan.
In addition, approximately 79% of the home equity line of credit portfolio will not begin amortizing until after
2014. The following table outlines when home equity lines of credit convert to amortizing for the home equity
line of credit portfolio as of December 31, 2011:

Period of Conversion to Amortizing Loan

Already amortizing
Year ending December 31, 2012
Year ending December 31, 2013
Year ending December 31, 2014
After December 31, 2014

% of Home Equity Line of
Credit Portfolio

7%
3%
4%
7%
79%

The following tables show the distribution of the mortgage loan portfolios by credit quality indicator

(dollars in millions):

Current LTV/CLTV(1)

<=80%
80%-100%
100%-120%
>120%

Total mortgage loans receivable

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$1,596.3
1,716.8
1,527.3
1,775.4
$6,615.8

$2,233.2
2,329.5
1,732.1
1,875.5
$8,170.3

$1,168.9
967.9
1,191.9
2,000.0
$5,328.7

$1,484.9
1,302.9
1,482.8
2,139.7
$6,410.3

Average estimated current LTV/CLTV(2)
Average LTV/CLTV at loan origination(3)

106.7%
71.0%

100.8%
70.6%

112.1%
79.2%

107.7%
79.3%

(1) Current CLTV calculations for home equity loans are based on the maximum available line for home equity lines of credit and
outstanding principal balance for home equity installment loans. Current property values are updated on a quarterly basis using the most
recent property value data available to us. For properties in which we did not have an updated valuation, we utilized home price indices
to estimate the current property value.
The average estimated current LTV/CLTV ratio reflects the outstanding balance at the balance sheet date, divided by the estimated
current value of the underlying property.

(2)

(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 undrawn balances for home equity loans.

Documentation Type

Full documentation
Low/no documentation

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$2,845.6
3,770.2

$3,556.5
4,613.8

$2,699.2
2,629.5

$3,201.4
3,208.9

Total mortgage loans receivable

$6,615.8

$8,170.3

$5,328.7

$6,410.3

Current FICO(1)

>=720
719 - 700
699 - 680
679 - 660
659 - 620
<620

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$3,557.6
585.2
448.6
385.0
525.9
1,113.5

$4,438.4
709.6
566.3
434.8
634.0
1,387.2

$2,780.2
497.7
408.8
325.8
447.9
868.3

$3,101.8
665.7
550.8
411.7
512.5
1,167.8

Total mortgage loans receivable

$6,615.8

$8,170.3

$5,328.7

$6,410.3

(1)

FICO scores are updated on a quarterly basis; however, as of December 31, 2011 and 2010, there were some loans for which the updated
FICO scores were not available. The current FICO distribution as of December 31, 2011 included original FICO scores for
approximately $153 million and $30 million of one- to four-family and home equity loans, respectively. The current FICO distribution as
of December 31, 2010 included original FICO scores for approximately $218 million and $168 million of one- to four-family and home
equity loans, respectively.

Acquisition Channel

Purchased from a third party
Originated by the Company

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$5,420.8
1,195.0

$6,687.7
1,482.6

$4,669.6
659.1

$5,607.2
803.1

Total mortgage loans receivable

$6,615.8

$8,170.3

$5,328.7

$6,410.3

Vintage Year

2003 and prior
2004
2005
2006
2007
2008

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$ 239.9
620.5
1,377.7
2,528.5
1,841.1
8.1

$ 297.6
759.3
1,713.4
3,108.3
2,276.6
15.1

$ 302.6
472.9
1,387.0
2,480.0
674.8
11.4

$ 392.1
585.7
1,615.8
2,999.1
805.0
12.6

Total mortgage loans receivable

$6,615.8

$8,170.3

$5,328.7

$6,410.3

Geographic Location

California
New York
Florida
Virginia
Other states

Total mortgage loans receivable

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$3,096.0
488.2
458.2
280.8
2,292.6

$3,773.6
613.0
563.4
338.1
2,882.2

$1,690.3
387.0
377.8
234.1
2,639.4

$2,038.3
459.0
456.0
278.0
3,179.0

$6,615.8

$8,170.3

$5,328.6

$6,410.3

Approximately 40% of

the Company’s real estate loans were concentrated in California at both
December 31, 2011 and 2010. No other state had concentrations of real estate loans that represented 10% or more
of the Company’s real estate portfolio.

Additionally, we do not expect interest rate resets to be a material driver of credit costs in the future as less
than 1% of one- to four-family loans are expected to experience a payment increase of more than 10% and nearly
70% are expected to reset to a lower payment in 2012. We expect approximately $3.2 billion in one-to four-
family loans to reset in 2012 of which $1.1 billion are resetting for the first time.

Allowance for Loan Losses

The allowance for loan losses is management’s estimate of probable losses inherent in the loan portfolio as
of the balance sheet date. The estimate of the allowance for loan losses is based on a variety of quantitative and
qualitative factors, including the composition and quality of the portfolio; delinquency levels and trends; current
and historical charge-off and loss experience; our historical loss mitigation experience; the condition of the real
estate market and geographic concentrations within the loan portfolio; the interest rate climate; the overall
availability of housing credit; and general economic conditions. The allowance for loan losses is typically equal
to management’s forecast of loan losses in the twelve months following the balance sheet date as well as the
forecasted losses, including economic concessions to borrowers, over the estimated remaining life of loans
modified as TDRs.

The following table presents the allowance for loan losses by major loan category (dollars in millions):

One- to Four-Family

Home Equity

Consumer and Other

Total

December 31, 2011
December 31, 2010

Allowance

$314.2
$389.6

Allowance as
a % of Loans
Receivable(1) Allowance

Allowance as
a % of Loans
Receivable(1)

4.73% $463.3
4.75% $576.1

8.60% $45.3
8.87% $65.5

4.02% $ 822.8
4.48% $1,031.2

6.25%
6.38%

(1) Allowance as a percentage of loans receivable is calculated based on the gross loans receivable for each respective category.

During the year ended December 31, 2011, the allowance for loan losses decreased by $208.4 million from
the level at December 31, 2010. The decrease was driven by improving credit trends and loan portfolio run-off,
as evidenced by the lower levels of delinquent loans in the one- to four-family and home equity loan portfolios.
The provision for loan losses has declined for three consecutive years, down 72% from its peak of $1.6 billion for
the year ended December 31, 2008. We expect provision for loan losses to continue to decline in 2012 when
compared to 2011, although it is subject to variability from quarter to quarter.

modification programs, as well as uncertainty around certain loans modified under our previous programs. Once
the evaluation of the existing programs and practices is complete and any necessary changes have been
implemented, we will re-assess the overall qualitative reserve. See Summary of Critical Accounting Policies and
Estimates for a discussion of the estimates and assumptions used in the allowance for loan losses, including the
qualitative reserve.

Troubled Debt Restructurings

Included in allowance for loan losses was a specific allowance of $320.1 million and $357.0 million that
was established for TDRs at December 31, 2011 and 2010, respectively. The specific allowance for these
individually impaired loans represents the forecasted losses over the remaining life of the loan, including the
economic concession to the borrower. The following table shows loans that have been modified in a TDR and the
specific valuation allowance by loan portfolio as well as the percentage of total expected losses as of
December 31, 2011 and 2010 (dollars in millions):

December 31, 2011
One- to four-family
Home equity

Total

December 31, 2010
One- to four-family
Home equity

Total

Recorded
Investment in
TDRs

Specific
Valuation
Allowance

Net Investment in
TDRs

Specific Valuation
Allowance as a %
of TDR Loans

Total
Expected
Losses

$ 973.0
445.9

$1,418.9

$ 548.6
488.3

$1,036.9

$101.2
218.9

$320.1

$ 84.5
272.5

$357.0

$ 871.8
227.0

$1,098.8

$ 464.1
215.8

$ 679.9

10%
49%

23%

15%
56%

34%

28%
55%

35%

28%
59%

42%

The recorded investment in TDRs includes the charge-offs related to certain loans that were written down to
the estimated current value of the underlying property less estimated costs to sell. These charge-offs were recorded
on loans that were delinquent in excess of 180 days or in bankruptcy prior to the loan modification. The total
expected loss on TDRs includes both the previously recorded charge-offs and the specific valuation allowance.

The following table shows the TDRs by delinquency category as of December 31, 2011 and 2010 (dollars in

millions):

December 31, 2011
One- to four-family
Home equity

Total

December 31, 2010
One- to four-family
Home equity

Total

TDRs
Current

TDRs 30-89
Days
Delinquent

TDRs 90-179
Days
Delinquent

TDRs 180+
Days
Delinquent

Total Recorded
Investment in
TDRs

$ 774.0
351.6

$1,125.6

$ 420.2
388.7

$ 808.9

$ 85.7
51.4

$137.1

$ 55.5
56.7

$112.2

$31.3
34.5

$65.8

$21.6
39.8

$61.4

$82.0
8.4

$90.4

$51.3
3.1

$54.4

$ 973.0
445.9

$1,418.9

$ 548.6
488.3

$1,036.9

TDRs on accrual status, which are current and have made six or more consecutive payments, were $795.3
million, $508.9 million and $222.8 million as of December 31, 2011, 2010 and 2009, respectively. We did not
have any TDRs as of December 31, 2008 and 2007.

We evaluate the re-delinquency rates in order to monitor TDR performance. We also monitor the average
re-delinquency rates for TDRs twelve months after the modification occurred, which are based on cumulative
performance since the modification program began.

The following table shows the average re-delinquency rates for TDRs twelve months after the modification

occurred:

December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
December 31, 2010

Net Charge-offs

One- to Four
-Family

Home Equity

29%
28%
31%
36%
42%

42%
42%
43%
44%
45%

The following table provides an analysis of the allowance for loan losses and net charge-offs for the past

five years (dollars in millions):

Allowance for loan losses, beginning of period
Provision for loan losses
Charge-offs:

One- to four-family
Home equity
Consumer and other

Total charge-offs

Recoveries:

One- to four-family
Home equity
Consumer and other

Total recoveries

Year Ended December 31,

2011

2010

2009

2008

2007

$1,031.2
440.6

$1,182.7
779.4

$ 1,080.6
1,498.1

508.2
1,583.7

$ 67.6
640.1

(228.9)
(457.3)
(59.3)

(302.6)
(600.0)
(80.3)

(364.3)
(966.3)
(111.6)

(138.0)
(820.2)
(84.8)

(5.7)
(168.1)
(53.9)

(745.5)

(982.9)

(1,442.2)

(1,043.0)

(227.7)

20.8
58.1
17.6

96.5

—
26.6
25.4

52.0

—
15.3
30.9

46.2

0.4
8.2
23.1

31.7

0.5
4.4
23.3

28.2

Net charge-offs

(649.0)

(930.9)

(1,396.0)

(1,011.3)

(199.5)

Allowance for loan losses, end of period

$ 822.8

$1,031.2

$ 1,182.7

$ 1,080.6

$ 508.2

Net charge-offs to average loans receivable outstanding

4.42%

5.10%

6.04%

3.64% 0.65%

The following table allocates the allowance for loan losses by loan category (dollars in millions):

2011

2010

December 31,

2009

2008

2007

Amount %(1)

One- to four-family
Home equity
Consumer and other

Total allowance for

$314.2
463.3 40.8
8.5

45.3

50.7% $ 389.6

51.0% $ 489.9

52.4% $ 185.2

51.3% $ 18.8

51.3%

576.1 40.0
9.0

65.5

620.0 38.5
9.1

72.8

833.8 39.6
9.1

61.6

459.2 39.4
9.3

30.2

loan losses

$822.8 100.0% $1,031.2 100.0% $1,182.7 100.0% $1,080.6 100.0% $508.2 100.0%

(1) Represents percentage of loans receivable in the category to total loans receivable, excluding premiums (discounts).

Loan losses are recognized when it is probable that a loss has been incurred. The charge-off policy for both
one- to four-family and home equity loans is to assess the value of the property when the loan has been
delinquent for 180 days or is in bankruptcy, regardless of whether or not the property is in foreclosure, and
charge-off the amount of the loan balance in excess of the estimated current value of the underlying property less
estimated costs to sell. Closed-end consumer loans are charged-off when the loan has been 120 days delinquent
or when it is determined that collection is not probable.

Net charge-offs for the year ended December 31, 2011 compared to 2010 decreased by $281.9 million. Net
charge-offs declined for two consecutive years, down 54% from its peak of $1.4 billion for the year ended
December 31, 2009. The overall decrease was due primarily to lower delinquencies in both one- to four- family
and home equity loans. We believe net charge-offs will continue to decline in future periods as a result of the
downward trend in special mention delinquencies, which is discussed below. However, because the timing and
magnitude of the improvement is affected by many factors, we anticipate variability from quarter to quarter while
continuing to see a downward trend over the long term. The following graph illustrates the net charge-offs by
quarter:

Net charge-offs Trend

)
s
n
o
i
l
l
i

m
n
i

s
r
a
l
l
o
d
(

s
f
f
o
-
e
g
r
a
h
c

t
e
N

$350

$300

$250

$200

$150

$100

$50

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Quarter ended

One- to four-family

Home equity

Consumer and other

Total

Nonperforming Assets

We classify loans as nonperforming when they are no longer accruing interest, which includes loans that are
90 days past due and TDRs that are on nonaccrual status for all classes of loans. The following table shows the
comparative data for nonperforming loans and assets (dollars in millions):

One- to four-family
Home equity
Consumer and other

December 31,

2011

2010(1)

2009(1)

2008(1)

2007(1)

930.2
281.4
4.5

$ 1,256.2
360.8
5.5

$ 1,335.9
430.2
6.7

$ 593.1
341.2
7.8

$ 181.3
229.5
7.6

Total nonperforming loans

1,216.1

1,622.5

1,772.8

942.1

418.4

Real estate owned (“REO”) and other repossessed

assets, net

87.6

133.5

115.7

108.1

45.9

Total nonperforming assets, net

$ 1,303.7

$ 1,756.0

$ 1,888.5

$1,050.2

$ 464.3

Nonperforming loans receivable as a percentage of

gross loans receivable

One- to four-family allowance for loan losses as a

percentage of one- to four-family nonperforming
loans

Home equity allowance for loan losses as a percentage

9.24%

10.04%

8.71%

3.69%

1.37%

33.78%

31.01%

36.67% 31.22% 10.39%

of home equity nonperforming loans

164.64% 159.67% 144.15% 244.34% 200.05%

Consumer and other allowance for loan losses as a

percentage of consumer and other nonperforming
loans

Total allowance for loan losses as a percentage of total

1000.46% 1194.56% 1082.29% 790.72% 396.71%

nonperforming loans

67.66%

63.56%

66.73% 114.70% 121.44%

(1) Nonperforming loans have been represented to include loans that are 90 days past due and TDRs that are on nonaccrual status for all

classes of loans.

During the year ended December 31, 2011, nonperforming assets, net decreased $452.3 million to $1.3
billion when compared to December 31, 2010. This was attributed primarily to a decrease in nonperforming one-
to four-family loans of $326.0 million and home equity loans of $79.4 million for the year ended December 31,
2011 when compared to 2010.

The following graph illustrates the nonperforming loans by quarter:

Nonperforming Loans Trend

)
s
n
o
i
l
l
i

m
n
i

s
r
a
l
l
o
d
(

s
n
a
o
l

g
n
i
m
r
o
f
r
e
p
n
o
N

$2,000

$1,800

$1,600

$1,400

$1,200

$1,000

$800

$600

$400

$200

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Quarter ended

One- to four-family

Home equity

Consumer and other

Total

Delinquent Loans

We believe the distinction between loans delinquent 90 to 179 days and loans delinquent 180 days and
greater is important as loans delinquent 180 days and greater have been written down to their expected recovery
value, whereas loans delinquent 90 to 179 days have not (unless they are in process of bankruptcy). We believe
loans delinquent 90 to 179 days is an important measure because these loans are expected to drive the vast
majority of future charge-offs. Additional charge-offs on loans delinquent 180 days and greater are possible if
home prices decline beyond current expectations, but we do not anticipate these charge-offs to be significant,
particularly when compared to the expected charge-offs on loans delinquent 90 to 179 days. We expect the
balances of one- to four-family loans delinquent 180 days and greater to decline over time; however, we expect
the balances to remain at high levels in the near term due to the extensive amount of time it takes to foreclose on
a property in the current real estate market.

The following table shows the comparative data for loans delinquent 90 to 179 days (dollars in millions):

One- to four-family
Home equity
Consumer and other loans

Total loans delinquent 90-179 days(1)

December 31,

2011

2010

$136.2
99.7
4.1

$226.1
143.0
4.8

$240.0

$373.9

Loans delinquent 90-179 days as a percentage of gross loans receivable

1.82%

2.31%

(1)

The decrease in loans delinquent 90-179 days includes the impact of loan modification programs in which borrowers who were 90-179
days past due were made current. Loans modified as TDRs are accounted for as nonaccrual loans at the time of modification and return
to accrual status after six consecutive payments are made in accordance with the modified terms.

The following graph shows the loans delinquent 90 to 179 days for each of our major loan categories:

Loans Delinquent 90 to 179 days Trend

)
s
n
o
i
l
l
i

n
i

s
r
a
l
l
o
d
(

s
y
a
d

9
7
1

o
t

0
9

t
n
e
u
q
n
i
l
e
D
s
n
a
o
L

$600

$500

$400

$300

$200

$100

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Quarter ended

One- to four-family

Home equity

Consumer and other

Total

In addition to nonperforming assets, we monitor loans in which a borrower’s past credit history casts doubt
on their ability to repay a loan. We classify loans as special mention when they are between 30 and 89 days past
due. The following table shows the comparative data for special mention loans (dollars in millions):

One- to four-family
Home equity
Consumer and other loans

Total special mention loans(1)

December 31,

2011

2010

$294.8
154.6
17.7

$388.6
175.6
25.2

$467.1

$589.4

Special mention loans receivable as a percentage of gross loans receivable

3.55%

3.65%

(1)

The decrease in special mention loans includes the impact of loan modification programs in which borrowers who were 30 to 89 days
past due were made current. Loans modified as TDRs are accounted for as nonaccrual loans at the time of modification and return to
accrual status after six consecutive payments are made in accordance with the modified terms.

The trend in special mention loan balances are 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 is
approximately 95%.

During the year ended December 31, 2011, special mention loans decreased by $122.3 million to $467.1
million and are down 53% from their peak of $1.0 billion as of December 31, 2008. This decrease was largely
due to a decrease in both one- to four-family and home equity special mention loans. While the level of special
mention loans can fluctuate significantly in any given period, we believe the continued decrease is an
encouraging sign regarding the future credit performance of the mortgage loan portfolio.

The following graph illustrates the special mention loans by quarter:

Special Mention Loans Trend

)
s
n
o
i
l
l
i

m
n
i

s
r
a
l
l
o
d
(

s
n
a
o
l

n
o
i
t
n
e
m

l
a
i
c
e
p
S

$900

$800

$700

$600

$500

$400

$300

$200

$100

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Quarter ended

One- to four-family

Home equity

Consumer and other

Total

Securities

We focus primarily on security type and credit rating to monitor credit risk in our securities portfolios. We
believe our highest concentration of credit risk within this portfolio is the non-agency CMO portfolio. The table
below details the amortized cost of debt securities and FHLB stock by average credit ratings and type of asset as
of December 31, 2011 and 2010 (dollars in millions):

December 31, 2011

AAA

BBB

Agency mortgage-backed securities and CMOs
Other agency debt securities
Agency debentures
Non-agency CMOs
Municipal bonds, corporate bonds and FHLB

$19,069.0
1,160.6
788.5
5.6

$ — $ — $ —
—
—
16.1

—
118.2
9.9

—
—
8.0

Below
Investment
Grade and
Non-Rated

$ —
—
—
383.0

Total

$19,069.0
1,160.6
906.7
422.6

stock

Total

150.8

20.0

8.0

9.5

19.9

208.2

$21,174.5

$148.1

$ 16.0

$25.6

$402.9

$21,767.1

December 31, 2010

AAA

BBB

Agency mortgage-backed securities and CMOs
Agency debentures
Other agency debt securities
Non-agency CMOs
Municipal bonds, corporate bonds and FHLB

$14,946.9
1,543.7
502.5
37.4

$ — $ — $ —
—
—
9.0

—
—
115.7

—
—
49.3

Below
Investment
Grade and
Non-Rated

$ —
—
—
278.9

Total

$14,946.9
1,543.7
502.5
490.3

stock

Total

194.8

—

17.4

19.9

—

232.1

$17,225.3

$ 49.3

$133.1

$28.9

$278.9

$17,715.5

S&P downgraded the long-term debt rating of the U.S. government from AAA to AA+ in 2011 while
Moody’s and Fitch maintained their AAA rating. We categorize securities based on average credit rating and as a
result, the credit ratings for agency mortgage-backed securities and CMOs, other agency debt securities and
agency debentures backed by the U.S. government continued to be classified as AAA as of December 31, 2011.

Certain non-agency CMOs were other-than-temporarily impaired as a result of the deterioration in the
expected credit performance of the underlying loans in those specific securities. As of December 31, 2011, we
held approximately $329.9 million in amortized cost of non-agency CMOs that had been other-than-temporarily
impaired. We recorded $14.9 million, $37.7 million and $89.1 million of net impairment for the years ended
December 31, 2011, 2010 and 2009, respectively, related to other-than-temporarily impaired non-agency CMOs.
Further declines in the performance of our non-agency CMO portfolio could result in additional impairments in
future periods.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in conformity with GAAP. Note 1–Organization,
Basis of Presentation and Summary of Significant Accounting Policies of Item 8. Financial Statements and
Supplementary Data contains a summary of our significant accounting policies, many of which require the use of
estimates and assumptions. We believe that of our significant accounting policies, the following are noteworthy
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 our financial condition and
results of operations.

Allowance for Loan Losses

Description

The allowance for loan losses is management’s estimate of probable losses inherent in the loan portfolio as
of the balance sheet date. In determining the adequacy of the allowance, we perform periodic evaluations of the
loan portfolio and loss forecasting assumptions. As of December 31, 2011, the allowance for loan losses was
$822.8 million on $13.1 billion of total loans receivable designated as held-for-investment.

Judgments

Determining the adequacy of the allowance is complex and requires judgment by management about the
effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors
then prevailing, may result in significant changes in the allowance for loan losses in future periods. We evaluate
the adequacy of the allowance for loan losses by loan portfolio segment: one- to four-family, home equity and
consumer and other loan portfolios. The estimate of the allowance for loan losses is based on a variety of
quantitative and qualitative factors, including the composition and quality of the portfolio; delinquency levels
and trends; current and historical charge-off and loss experience; our historical loss mitigation experience; the
condition of the real estate market and geographic concentrations within the loan portfolio; the interest rate
climate; the overall availability of housing credit; and general economic conditions. The allowance for loan
losses is typically equal to management’s forecast of loan losses in the twelve months following the balance
sheet date as well as the forecasted losses, including economic concessions to borrowers, over the estimated
remaining life of loans modified as TDRs.

For loans that are not TDRs, we established a general allowance. The one- to four-family and home equity
loan portfolios are separated into risk segments based on key risk factors, which include but are not limited to
loan type, loan acquisition channel, delinquency history, documentation type, LTV/CLTV ratio and borrowers’
credit scores. 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. Both
current CLTV and FICO scores are among the factors utilized to categorize the risk associated with mortgage
loans and assign a probability assumption of future default. We utilize historical mortgage loan performance data
to calibrate the forecast of future delinquency and default for these risk segments. The consumer and other loan
portfolio is separated into risk segments by product and delinquency status. We utilize historical performance
data and historical recovery rates on collateral liquidation to forecast future delinquency and loss at the product
level. The one- to four-family and home equity loan portfolios represented 51% and 41%, respectively, of total
loans receivable as of December 31, 2011. The consumer and other loan portfolio represented 8% of total loans
receivable as of December 31, 2011.

The general allowance for loan losses also included a qualitative component to account for a variety of
economic and operational factors that are not directly considered in the quantitative loss model but are factors we
believe may impact the level of credit losses. Examples of these economic and operational factors are changes in
the level of unemployment and the limited historical charge-off and loss experience on modified loans. The
qualitative component for the consumer and other loan portfolio was 15% of the general allowance for loan
losses at December 31, 2011 and 2010. The qualitative component for the one- to four-family and home equity
loan portfolios increased from 15% of the general allowance for loan losses at December 31, 2010 to 35% at
December 31, 2011. The total qualitative factor was $124 million as of December 31, 2011. As the OCC
conducts its first cycle of examinations since succeeding to the OTS as our bank’s primary federal banking
supervisor, its views of our loan-related programs and practices that were designed in accordance with guidance
from the OTS may differ from the views previously taken by the OTS and may result in our making changes to
such programs and practices. As part of this regulatory transition, we are evaluating programs and practices that
were designed in accordance with guidance from the OTS. We are working to align certain policies and
procedures to the guidance from the OCC and have suspended certain modification programs that will require
changes. We increased the qualitative reserve in 2011 to reflect additional estimated losses during the period of

reduced activity in our modification programs, as well as uncertainty around certain loans modified under our
previous programs. Once the evaluation of the existing programs and practices is complete and any necessary
changes have been implemented, we will re-assess the overall qualitative reserve.

For modified loans accounted for as TDRs, we established a specific allowance. The specific allowance for
TDRs factors in the historical default rate of an individual loan before being modified as a TDR in the discounted
cash flow analysis in order to determine that specific loan’s expected impairment. For both of the one- to four-
family and home equity loan portfolio segments, each loan’s individual default experience is analyzed in addition
to the performance observed in similar seasoned TDRs in our overall TDR program when calculating the specific
allowance. A specific allowance is established to the extent that the recorded investment exceeds the discounted
cash flows of a TDR with a corresponding charge to provision for loan losses. The specific allowance for these
individually impaired loans represents the forecasted losses over the estimated remaining life of the loan,
including the economic concession to the borrower.

Effects if Actual Results Differ

The crisis in the residential real estate and credit markets has substantially increased the complexity and
uncertainty involved in estimating the losses inherent in the loan portfolio. In the current market it is difficult to
estimate how potential changes in the quantitative and qualitative factors might impact the allowance for loan
losses. If our underlying assumptions and judgments prove to be inaccurate, the allowance for loan losses could
be insufficient to cover actual losses. We may be required under such circumstances to further increase the
provision for loan losses, which could have an adverse effect on the regulatory capital position and our results of
operations in future periods.

Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowances

Description

In preparing the consolidated financial statements, we calculate income tax expense (benefit) based on our
interpretation of the tax laws in the various jurisdictions where we conduct business. This requires us to estimate
current tax obligations and the realizability of uncertain tax positions and to assess temporary differences between
the financial statement carrying amounts and the tax basis of assets and liabilities. These differences result in
deferred tax assets and liabilities, the net amount of which we show as other assets or other liabilities on the
consolidated balance sheet. We must also assess the likelihood that each of the deferred tax assets will be realized.
To the extent we believe that realization is not more likely than not, we establish a valuation allowance. When we
establish a valuation allowance or increase this allowance in a reporting period, we generally record a corresponding
tax expense in the consolidated statement of income (loss). Conversely, to the extent circumstances indicate that a
valuation allowance is no longer necessary, that portion of the valuation allowance is reversed, which generally
reduces overall income tax expense. At December 31, 2011 we had deferred tax assets of $1.6 billion, net of a
valuation allowance (on state, foreign country and charitable contribution deferred tax assets) of $73.5 million.

Judgments

Management must make significant judgments to determine the provision for income tax expense (benefit),
deferred tax assets and liabilities and any valuation allowance to be recorded against net deferred tax assets.
Changes in our estimate of these taxes occur periodically due to changes in the tax rates, changes in business
operations, implementation of tax planning strategies, the expiration of relevant statutes of limitations, resolution
with taxing authorities of uncertain tax positions and newly enacted statutory, judicial and regulatory guidance.

The most significant tax related judgment made by management was the determination of whether to
provide for a valuation allowance against net deferred tax assets. We are required to establish a valuation
allowance for deferred tax assets and record a charge to income if we determine, based on available evidence at
the time the determination is made, that it is more likely than not that some portion or all of the deferred tax
assets will not be realized.

Our analysis of the need for a valuation allowance recognizes that we are in a cumulative book loss position
as of the three-year period ended December 31, 2011, which is considered significant and objective evidence that
we may not be able to realize some portion of the deferred tax assets in the future. However, we did not establish
a valuation allowance against federal deferred tax assets as of December 31, 2011 as we believe that it is more
likely than not that all of these assets will be realized. Approximately two-thirds of existing federal deferred tax
assets are not related to net operating losses and therefore, have no expiration date. We expect to utilize the vast
majority of the existing federal deferred tax assets over the next seven years, with a small balance remaining as a
result of the current limitation caused by the ownership change (which is expected to be fully utilized in advance
of the statutory carry forward period).

Our evaluation focused on identifying significant, objective evidence that we will be able to realize the
deferred tax assets in the future. We determined that our expectations regarding future earnings are objectively
verifiable due to various factors. One factor is the consistent profitability of the core business, the trading and
investing segment, which has generated substantial income for each of the last eight years, including through
uncertain economic and regulatory environments. The core business is driven by brokerage customer activity and
includes trading, brokerage cash, margin lending, long-term investing and other brokerage related activities.
These activities drive variable expenses that correlate to the volume of customer activity, which has resulted in
stable, ongoing profitability.

Another factor is the mitigation of losses in the balance sheet management segment, which generated a large
net operating loss in 2007 caused by the crisis in the residential real estate and credit markets. Much of this loss
came from the sale of the asset-backed securities portfolio and credit losses from the mortgage loan portfolio. We
no longer hold any of those asset-backed securities and shut down mortgage loan acquisition activities in 2007.
In effect, the key business activities that led to the generation of the deferred tax assets were shut down over four
years ago. As a result,
the losses in the balance sheet management segment have continued to decline
significantly. In addition, we continue to realize the benefit of various credit loss mitigation activities for the
mortgage loans purchased in 2007 and prior, most notably, actively reducing or closing unused home equity lines
of credit and aggressively exercising put-back clauses to sell back improperly documented loans to the
originators. As a result of these loss containment measures, provision for loan losses has declined for three
consecutive years, down 72% from its peak of $1.6 billion for the year ended December 31, 2008.

Effects if Actual Results Differ

Changes in tax expense (benefit) due to the actual effective tax rates differing from our estimates affect
accrued taxes and could be material to results of operations for any particular reporting period. In evaluating the
need for a valuation allowance, we estimated future taxable income based on management approved forecasts.
This process required significant judgment by management about matters that are by nature uncertain. If future
events differ significantly from our current forecasts, a valuation allowance may need to be established, which
could have a material adverse effect on our financial condition and results of operations.

Classification and Valuation of Certain Investments

Description

The classification of an investment determines its accounting treatment. We classify our investments in
securities as trading, available-for-sale or held-to-maturity. Trading securities are carried at fair value and both
unrealized and realized gains and losses are recognized in the consolidated statement of income (loss). Securities

classified as available-for-sale are carried at fair value with unrealized gains and losses included in accumulated
other comprehensive loss, net of tax. Held-to-maturity securities are carried at amortized cost based on our
positive intent and ability to hold these securities to maturity. Declines in fair value for available-for-sale and
held-to-maturity debt securities that we believe to be other-than-temporary are included in the consolidated
statement of income (loss) in the net impairment line item. As of December 31, 2011, the available-for-sale and
held-to-maturity securities portfolios consisted of debt securities,
the majority of which were residential
mortgage-backed securities.

Available-for-sale and held-to-maturity securities that have unrealized or unrecognized losses (impaired
securities) are evaluated for OTTI at each balance sheet date. We consider OTTI for an available-for-sale or
held-to-maturity debt security to have occurred if one of the following conditions are met: we intend to sell the
impaired debt security; it is more likely than not that we will be required to sell the impaired debt security before
recovery of the security’s amortized cost basis; or we do not expect to recover the entire amortized cost basis of
the security. If we intend to sell an impaired debt security or if it is more likely than not that we will be required
to sell the impaired debt security before recovery of the security’s amortized cost basis, we will recognize OTTI
in earnings equal to the entire difference between the security’s amortized cost basis and the security’s fair value.
For impaired debt securities that we do not intend to sell and it is not more likely than not that we will be
required to sell before recovery of the security’s amortized cost basis, if we do not expect to recover the entire
amortized cost basis of the securities, we will separate OTTI into two components: 1) the amount related to credit
loss, recognized in earnings; and 2) the noncredit portion of OTTI, recognized through other comprehensive
income (loss). For the year ended December 31, 2011, we recognized $14.9 million of net impairment on certain
securities in the non-agency CMO portfolio.

Judgments

Our evaluation of whether we intend to sell an impaired debt security considers whether management has
decided to sell the security as of the balance sheet date. Our evaluation of whether it is more likely than not that
we will be required to sell an impaired debt security before recovery of the security’s amortized cost basis
considers the likelihood of sales that involve legal, regulatory or operational requirements. For impaired debt
securities that we do not intend to sell and it is not more likely than not that we will be required to sell before
recovery of the security’s amortized cost basis, we use both qualitative and quantitative valuation measures to
evaluate whether we expect to recover the entire amortized cost basis of the security. We consider all available
information relevant to the collectibility of the security, including credit enhancements, security structure,
vintage, credit ratings and other relevant collateral characteristics.

Effects if Actual Results Differ

Determining if a security has OTTI is complex and requires judgment by management about circumstances
that are inherently uncertain. Subsequent evaluations of these securities, in light of factors then prevailing, may
result in additional OTTI in future periods. If all available-for-sale and held-to-maturity securities with fair
values lower than amortized cost as of December 31, 2011 were other-than-temporarily impaired and the gross
OTTI was recorded through earnings, we would have recorded a pre-tax loss of $117.5 million.

Accounting for Derivative Instruments

Description

We enter into derivative transactions primarily to protect against interest rate risk on the value of certain
assets, liabilities and future cash flows. Accounting for derivatives differs significantly depending on whether a
derivative is designated as a hedge. Derivative instruments in hedging relationships that mitigate exposure to
changes in the fair value of assets or liabilities are considered fair value hedges. Derivative instruments
designated in hedging relationships that mitigate exposure to the variability in expected future cash flows or other

forecasted transactions are considered cash flow hedges. In order to qualify for hedge accounting treatment,
documentation must indicate the intention to designate the derivative as a hedge of a specific asset or liability or
a future cash flow. Effectiveness of the hedge must be monitored over the life of the derivative instrument.

Each derivative instrument is recorded on the consolidated balance sheet at fair value as a freestanding asset
or liability. 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 of the derivatives and the underlying assets or liabilities are recognized in the gains on loans and securities,
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 on
loans and securities, net line item in the consolidated statement of income (loss). Cash flow hedges are accounted
for by recording the fair value of the derivative instrument on the consolidated balance sheet. The effective
portion of the changes in fair value of the derivative instrument in a cash flow hedge is reported as a component
of accumulated other comprehensive loss, net of tax in the consolidated balance sheet, for both active and
terminated hedges. Amounts are then included in net operating interest income as a yield adjustment in the same
period the hedged forecasted transaction affects earnings. The ineffective portion of the changes in fair value of
the derivative instrument in a cash flow hedge is reported in the gains on loans and securities, net line item in the
consolidated statement of income (loss).

Cash flow hedge relationships are treated as effective hedges as long as the hedged forecasted transactions
remain probable and the hedges continue to meet the requirements of derivatives and hedging accounting
guidance. If it becomes probable that a hedged forecasted transaction will not occur, amounts included in
accumulated other comprehensive loss related to the specific hedging instruments would be immediately
reclassified into the gains on loans and securities, net line item in the consolidated statement of income (loss). As
of December 31, 2011, we had an unrealized pre-tax loss reported in accumulated other comprehensive loss of
$734.2 million related to cash flow hedges.

Judgments

The future issuances of

liabilities underlying cash flow hedge relationships,

including repurchase
agreements, are largely dependent on the market demand and liquidity in the wholesale borrowings market. As of
December 31, 2011, we believe the forecasted issuance of all liabilities in cash flow hedge relationships is
probable. However, unexpected changes in market conditions in future periods could impact our ability to issue
these liabilities. We believe the forecasted issuance of liabilities in the form of repurchase agreements is most
susceptible to an unexpected change in market conditions.

Effects if Actual Results Differ

If our hedging strategies were to no longer meet the effectiveness criterion or our assumptions about the
nature and timing of forecasted transactions were to be inaccurate, we could no longer apply hedge accounting
and our reported results would be significantly affected. For example, if we determined that the forecasted
issuance of repurchase agreements associated with our cash flow hedges was no longer probable, the $595.2
million pre-tax loss in accumulated other comprehensive loss related to cash flow hedges on repurchase
agreements would be reclassified into the gains on loans and securities, net line item in the consolidated
statement of income (loss) in the period in which this determination was made. This loss would have a material
adverse effect on our regulatory capital position and results of operations.

Fair Value Measurements

Description

less than 1% of total assets and total liabilities, respectively, represented instruments measured at fair value on a
recurring basis. The fair value measurement accounting guidance describes the following three levels used to
classify fair value measurements:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• 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.

In determining fair value, we may use various valuation approaches, including market, income and/or cost
approaches. The fair value hierarchy requires us 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, our
own assumptions reflect
those that market participants would use in pricing the asset or liability at the
measurement date. 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. Our 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.

Judgments

Of assets measured at fair value on a recurring basis, 91% were available-for-sale residential mortgage-
backed securities as of December 31, 2011. Our available-for-sale residential mortgage-backed securities
portfolio was composed of: 1) agency mortgage-backed securities and CMOs; and 2) non-agency CMOs. The
fair value of agency mortgage-backed securities and CMOs was determined using quoted market prices, recent
market transactions, spread data and our own trading activities for identical or similar instruments and were
categorized in Level 2 of the fair value hierarchy. Non-agency CMOs were valued using market observable data,
including recent market transactions when available. We also utilized a pricing service to corroborate the market
observability of our inputs used in the fair value measurements of non-agency CMOs. The valuations of
non-agency CMOs reflect our best estimate of what market participants would consider in pricing the financial
instruments. We consider the price transparency for these financial instruments to be a key determinant of the
degree of judgment involved in determining the fair value. The majority of non-agency CMOs were categorized
in Level 2 of the fair value hierarchy as of December 31, 2011.

Effects if Actual Results Differ

The use of different methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different estimate of fair value. As of December 31, 2011, less than 1% of total
assets and none of total liabilities represented instruments measured at fair value on a recurring basis categorized
as Level 3. While our recurring fair value estimates of Level 3 instruments utilized observable inputs where
available, the valuations included significant management judgment in determining the relevance and reliability
of market information considered.

Valuation of Goodwill and Other Intangibles

Description

We review goodwill and purchased intangible assets for impairment on at least an annual basis or when
events or changes indicate the carrying value may not be recoverable. Goodwill at December 31, 2011 was $1.9
billion and other intangible assets net of amortization at December 31, 2011 were $0.3 billion. Other intangible
assets have a weighted average remaining useful life of 14 years.

Judgments

The valuation of goodwill and other intangible assets depends on a number of factors, including estimates of
future market growth and trends, forecasted revenue and costs, expected useful lives of the assets, appropriate
discount rates and other variables. Goodwill is allocated to reporting units, which are components of the business
that are one level below operating segments. Each of these reporting units is tested for impairment individually
during the annual evaluation. There is no goodwill assigned to reporting units within the balance sheet
management segment. The following table shows the amount of goodwill allocated to each of the reporting units
in the trading and investing segment (dollars in millions):

Reporting Unit

U.S. Brokerage
Capital Markets
Retail Bank

Total goodwill

December 31, 2011

$1,751.2
142.4
40.6

$1,934.2

In connection with our annual impairment test of goodwill, we concluded that the goodwill was not
impaired as the fair value of the reporting units was in excess of the book value of those reporting units as of
December 31, 2011. The fair value of the reporting units exceeded the book value of those reporting units by
substantial amounts (fair value as a percent of book value ranged from approximately 150% to 700%) and
therefore did not indicate a significant risk of goodwill impairment based on current projections and valuations.
We also evaluate the remaining useful lives on intangible assets each reporting period to determine whether
events and circumstances warrant a revision to the remaining period of amortization.

Effects if Actual Results Differ

If our estimates of fair value for the reporting units change due to changes in our business or other factors,
we may determine that an impairment charge is necessary. Estimates of fair value are determined based on a
complex model using cash flows and company comparisons. If management’s estimates of future cash flows are
inaccurate, the fair value determined could be inaccurate and impairment would not be recognized in a timely
manner. Intangible assets are amortized over their estimated useful lives. If changes in the estimated underlying
revenue occur, impairment or a change in the remaining life may need to be recognized.

STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES

The following table outlines the information required by the SEC’s Industry Guide 3, “Statistical Disclosure

by Bank Holding Companies.” These disclosures are at the enterprise level.

Required Disclosure

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Operating Interest

Differential

Average Balance Sheet and Analysis of Net Interest Income
Net Operating Interest Income—Volumes and Rates Analysis

Investment Portfolio

Investment Portfolio—Book Value and Fair Value
Investment Portfolio Maturity

Loan Portfolio

Loans by Type
Loan Maturities
Loan Sensitivities

Risk Elements

Nonaccrual, Past Due and Restructured Loans
Past Due Interest
Policy for Nonaccrual

Potential Problem Loans
Summary of Loan Loss Experience

Analysis of Allowance for Loan Losses
Allocation of the Allowance for Loan Losses

Deposits

Average Balance and Average Rates Paid
Time Deposit Maturities
Time Deposits in Excess of the FDIC Deposit Insurance Coverage Limits

Return on Equity and Assets
Short-Term Borrowings

Page

34
81

83
84

82
82
82

69
129
104
71

67
67

34
139
139
35
85

Interest Rates and Operating Interest Differential

Increases and decreases in operating interest income and operating interest expense result from changes in
average balances (volume) of enterprise interest-earning assets and enterprise interest-bearing liabilities, as well
as changes in average interest rates (rate). The following table shows the effect that these factors had on the
interest earned on our enterprise interest-earning assets and the interest incurred on our enterprise interest-bearing
liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous
year’s average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average
yield/cost by the previous year’s volume. Changes applicable to both volume and rate have been allocated
proportionately (dollars in millions):

2011 Compared to 2010
Increase (Decrease) Due To

2010 Compared to 2009
Increase (Decrease) Due To

Volume

Rate

Total

Volume

Rate

Total

Enterprise interest-earning assets:

Loans(1)
Margin receivables
Available-for-sale securities
Held-to-maturity securities
Cash and equivalents
Segregated cash and investments
Securities borrowed and other

$(170.5) $(16.4) $(186.9) $(231.7) $ (27.4) $(259.1)
61.8
(85.6)
35.9
(9.4)
(2.3)
(21.0)

(1.4)
(147.7)
—
(4.3)
(0.2)
(19.0)

21.4
35.0
101.0
(2.2)
(1.0)
19.4

35.4
57.4
101.3
(1.6)
0.1
(1.9)

(14.0)
(22.4)
(0.3)
(0.6)
(1.1)
21.3

63.2
62.1
35.9
(5.1)
(2.1)
(2.0)

Total enterprise interest-earning assets(2)

20.2

(33.5)

(13.3)

(79.7)

(200.0)

(279.7)

Enterprise interest-bearing liabilities:

Retail deposits
Brokered certificates of deposit
Customer payables
Securities sold under agreements to repurchase
FHLB advances and other borrowings
Securities loaned and other

Total enterprise interest-bearing liabilities

3.4
(3.7)
1.2
(16.9)
(0.5)
—

(16.5)

(20.2)
0.5
0.4
40.4
(12.6)
(0.1)

(16.8)
(3.2)
1.6
23.5
(13.1)
(0.1)

(14.9)
(4.0)
0.1
(15.9)
(27.7)
0.4

(130.0)
(0.1)
(1.9)
(54.6)
(1.8)
(1.2)

(144.9)
(4.1)
(1.8)
(70.5)
(29.5)
(0.8)

8.4

(8.1)

(62.0)

(189.6)

(251.6)

Change in enterprise net interest

income

$ 36.7

$(41.9) $

(5.2) $ (17.7) $ (10.4) $ (28.1)

(1) Nonaccrual loans are included in the respective average loan balances. Income on such nonaccrual loans is recognized on a cash basis.
(2) Amount includes a taxable equivalent increase in operating interest income of $1.2 million, $1.2 million and $2.1 million for years ended

December 31, 2011, 2010 and 2009, respectively.

Lending Activities

The following table presents the balance and associated percentage of each major loan category in our

portfolio (dollars in millions):

2011

2010

December 31,

2009

2008

2007

Balance %

One- to four-family
Home equity
Consumer and other:

$ 6,615.8 50.7%$ 8,170.3
6,410.3
1,443.4

5,328.7 40.8
8.5
1,113.2

51.0% $10,567.1
7,769.7
40.0
1,841.3
9.0

52.4% $12,979.8
10,017.2
38.5
2,298.6
9.1

51.3% $15,506.9
11,901.3
39.6
2,823.3
9.1

51.3%
39.4
9.3

Total loans receivable

13,057.7 100.0% 16,024.0 100.0% 20,178.1 100.0% 25,295.6 100.0% 30,231.5 100.0%

Adjustments:

Premiums (discounts) and
deferred fees on loans
Allowance for loan losses

Total adjustments

97.9
(822.8)

(724.9)

129.1
(1,031.2)

(902.1)

171.6
(1,182.7)

(1,011.1)

236.8
(1,080.6)

(843.8)

315.5
(508.1)

(192.6)

Loans receivable, net $12,332.8

$15,121.9

$19,167.0

$24,451.8

$30,038.9

The following table shows the contractual maturities of the loan portfolio at December 31, 2011, including
scheduled principal repayments. This table does not, however, include any estimate of prepayments. These
prepayments could significantly shorten the average loan lives and cause the actual timing of the loan repayments
to differ from those shown in the following table (dollars in millions):

One- to four-family
Home equity
Consumer and other

Total loans receivable

Due in (1)

< 1 Year

1-5 Years

>5 Years

Total

$127.1
220.9
144.4

$ 573.9
998.9
384.2

$ 5,914.8
4,108.9
584.6

$ 6,615.8
5,328.7
1,113.2

$492.4

$1,957.0

$10,608.3

$13,057.7

(1)

Estimated scheduled principal repayments are calculated using weighted-average interest rate and weighted-average remaining maturity
of each loan portfolio.

The following table shows the distribution of those loans that mature in more than one year between fixed

and adjustable interest rate loans at December 31, 2011 (dollars in millions):

One- to four-family
Home equity
Consumer and other

Total loans receivable

Securities

Interest Rate Type

Fixed

Adjustable

Total

$1,500.2
1,138.0
954.9

$4,988.5
3,969.8
13.9

$ 6,488.7
5,107.8
968.8

$3,593.1

$8,972.2

$12,565.3

Our portfolio of mortgage-backed and investment securities is classified into three categories: trading,
available-for-sale or held-to-maturity. None of our mortgage-backed or investment securities were classified as
held-to-maturity during 2009.

Our mortgage-backed securities portfolio is primarily composed of:

•

Fannie Mae participation certificates, guaranteed by Fannie Mae;

Freddie Mac participation certificates, guaranteed by Freddie Mac;

• Ginnie Mae participation certificates, guaranteed by the full faith and credit of the U.S.; and

• Collateralized mortgage obligations.

The majority of our investment securities portfolio is composed of other agency debt securities and agency
debentures which are unsecured senior debt primarily offered by the Small Business Administration, Fannie Mae,
Freddie Mac and the FHLB.

Trading securities are carried at fair value with any realized or unrealized gains and losses reflected in our
consolidated statement of income (loss) as gains on loans and securities, net. Available-for-sale securities are
carried at fair value with the unrealized gains and losses reflected as a component of accumulated other
comprehensive loss. Held-to-maturity securities are carried at amortized cost based on the Company’s positive
intent and ability to hold these securities to maturity.

The following table shows the amortized cost and fair value of our mortgage-backed and investment securities

portfolio that the Company held and classified as available-for-sale and held-to-maturity (dollars in millions):

2011

December 31,

2010

2009

Amortized
Cost

Fair Value

Amortized
Cost

Fair Value

Amortized
Cost

Fair Value

Available-for-sale securities:

Residential mortgage-backed securities:
Agency mortgage-backed securities

and CMOs

Non-agency CMOs

Total residential mortgage-backed

securities

Investment securities:
Debt securities:

$13,772.1 $13,965.7 $13,017.8 $12,898.1 $ 8,945.4 $ 8,966.9
375.1

590.2

395.4

341.6

490.3

422.6

14,194.7

14,307.3

13,508.1

13,293.5

9,535.6

9,342.0

Agency debentures
Other agency debt securities
Municipal bonds
Corporate bonds

743.3
541.0
42.3
25.4

731.2
554.2
41.1
17.7

1,324.5
187.6
42.4
25.3

1,269.6
187.5
37.3
17.8

3,928.9
—
42.5
25.4

3,920.0
—
39.0
17.8

Total debt securities

1,352.0

1,344.2

1,579.8

1,512.2

3,996.8

3,976.8

Publicly traded equity securities:

Corporate investments

—

0.2

0.9

Total investment securities

1,352.0

1,344.2

1,579.8

1,512.2

3,997.0

3,977.7

Total available-for-sale securities

$15,546.7 $15,651.5 $15,087.9 $14,805.7 $13,532.6 $13,319.7

Held-to-maturity securities:

Residential mortgage-backed securities:
Agency mortgage-backed securities

and CMOs
Investment securities:
Debt securities:

$ 5,296.5 $ 5,458.0 $ 1,928.6 $ 1,897.0 $

— $

—

Agency debentures
Other agency debt securities

Total investment securities

163.4
619.6

783.0

169.2
655.8

825.0

219.2
314.9

534.1

216.2
309.1

525.3

—
—

—

Total held-to-maturity securities

$ 6,079.5 $ 6,283.0 $ 2,462.7 $ 2,422.3 $

— $

—
—

—

The following table shows the scheduled maturities, carrying values and current yields for the Company’s

available-for-sale and held-to-maturity investment portfolio at December 31, 2011 (dollars in millions):

Within One Year One to Five Years Five to Ten Years

After Ten Years

Total

Balance
Due

Weighted
Average
Yield

Balance
Due

Weighted
Average
Yield

Balance
Due

Weighted
Average
Yield

Balance
Due

Weighted
Average
Yield

Balance
Due

Weighted
Average
Yield

Available-for-sale securities:

Residential mortgage-backed

securities:
Agency mortgage-backed
securities and CMOs

Non-agency CMOs

Total residential

mortgage-backed
securities

Investment securities:
Debt securities:

Agency debentures
Other agency debt

securities

Municipal bonds(1)
Corporate bonds

Total investment
securities

Total available-for-
sale securities

Held-to-maturity securities:

Residential mortgage-backed

securities:
Agency mortgage-backed
securities and CMOs

Investment securities:
Debt securities:

$—
—

—
—

$ —
—

—
—

$1,278.0
0.2

2.48% $12,494.1
422.4
5.68%

3.56% $13,772.1
422.6
3.90%

3.46%
3.90%

—

—
—
—

—

—
—
—

—

—
—
—

—

—
—
—

1,278.2

12,916.5

14,194.7

88.2

4.13%

655.1

6.13%

743.3

5.84%

228.9
—
—

317.1

3.29%
—
—

312.1
42.3
25.4

3.02%
4.78%
0.95%

541.0
42.3
25.4

3.14%
4.78%
0.95%

1,034.9

1,352.0

$—

$ —

$1,595.3

$13,951.4

$15,546.7

$—

—

$ 62.1

2.48% $1,230.4

3.56% $ 4,004.0

3.74% $ 5,296.5

3.68%

Agency debentures
Other agency debt

securities

Total investment
securities

Total held-to-maturity

—

163.4

2.00%

—

163.4

2.00%

0.2

4.50%

415.3

3.64%

204.1

3.68%

619.6

3.65%

163.6

415.3

204.1

783.0

securities

$—

$225.7

$1,645.7

$ 4,208.1

$ 6,079.5

(1) Yields on tax-exempt obligations are computed on a tax-equivalent basis.

Borrowings

Deposits represent our most significant source of funding. In addition, we borrow from the FHLB and sell

securities under repurchase agreements.

We are a member of, and own capital stock in, the FHLB system. The FHLB provides us with reserve credit
capacity and authorizes us to apply for advances based on the security of pledged home mortgages and other
assets—principally securities that are obligations of, or guaranteed by, the U.S. Government—provided we meet
certain creditworthiness standards. At December 31, 2011, outstanding advances from the FHLB totaled $2.3
billion at interest rates ranging from 0.14% to 5.56% and at a weighted-average rate of 3.18%.

We also raise funds by selling securities under agreements to repurchase the same or similar securities. The
counterparties to these agreements hold the securities in custody. We treat repurchase agreements as borrowings
and secure them with designated fixed- and variable-rate securities. We also participate in the Federal Reserve
Bank’s term investment option and treasury, tax and loan borrowing programs. We use the proceeds from these
transactions to meet our cash flow or asset/liability matching needs.

The following table sets forth information regarding the weighted-average interest rates and the highest and

average month-end balances of borrowings (dollars in millions):

At or for the year ended December 31, 2011:
Securities sold under agreements to

repurchase

FHLB advances and other borrowings (2)
At or for the year ended December 31, 2010:
Securities sold under agreements to

repurchase

FHLB advances and other borrowings (2)
At or for the year ended December 31, 2009:
Securities sold under agreements to

Ending
Balance

Weighted-
Average Rate
(1)

Maximum
Amount at
Month-End

Yearly Weighted-Average

Balance

Rate

$5,015.5
$2,732.5

0.95%
3.19%

$5,891.6
$2,759.7

$5,417.2
$2,741.1

2.83%
3.87%

$5,888.3
$2,731.4

0.63%
3.09%

$6,458.1
$3,102.1

$6,154.3
$2,754.3

2.11%
4.33%

repurchase

FHLB advances and other borrowings (2)

$6,441.9
$2,745.3

0.71%
3.12%

$7,177.9
$4,372.4

$6,725.4
$3,392.0

2.98%
4.38%

(1)

(2)

Excludes hedging costs.
Excludes other borrowings of the parent company of $4.4 million, $0.3 million and $1.6 million at December 31, 2011, 2010 and 2009,
respectively, which do not generate operating interest expense. These liabilities generate corporate interest expense.

GLOSSARY OF TERMS

Active accounts—Accounts with a balance of $25 or more or a trade in the last six months.

Active customers—Customers that have an account with a balance of $25 or more or a trade in the last six

months.

Active Trader—The customer group that includes those who execute 30 or more stock or options trades per

quarter.

Adjusted total assets—E*TRADE Bank-only assets composed of total assets plus/(less) unrealized losses
(gains) on available-for-sale securities, less disallowed deferred tax assets, goodwill and certain other intangible
assets.

Agency—U.S. Government sponsored and federal agencies, such as Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation, Government National Mortgage Association, the Small Business
Administration and the Federal Home Loan Bank.

ALCO—Asset Liability Committee.

AML—Anti-Money Laundering.

APIC—Additional paid-in capital.

Average commission per trade—Total trading and investing segment commissions revenue divided by total

number of trades.

Average equity to average total assets—Average total shareholders’ equity divided by average total assets.

Bank—ETB Holdings, Inc. (“ETBH”), the entity that is our bank holding company and parent to E*TRADE

Bank.

Basis point—One one-hundredth of a percentage point.

BCBS—International Basel Committee on Banking Supervision.

BOLI—Bank-Owned Life Insurance.

CAMELS rating—A U.S. supervisory rating of a bank’s overall condition. The components of the rating

consist of Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk.

Cash flow hedge—A derivative instrument designated in a hedging relationship that mitigates exposure to

variability in expected future cash flows attributable to a particular risk.

CFPB—Consumer Financial Protection Bureau.

Charge-off—The result of removing a loan or portion of a loan from an entity’s balance sheet because the

loan is considered to be uncollectible.

CLTV—Combined loan-to-value.

CMOs—Collateralized mortgage obligations.

Corporate cash—Cash held at the parent company as well as cash held in certain subsidiaries that can

distribute cash to the parent company without any regulatory approval.

Customer assets—Market value of all customer assets held by the Company including security holdings,

customer cash and deposits and vested unexercised options.

Customer cash and deposits—Customer cash, deposits, customer payables and money market balances,

including those held by third parties.

Daily average revenue trades (“DARTs”)—Total revenue trades in a period divided by the number of

trading days during that period.

Debt Exchange—In the third quarter of 2009, we exchanged $1.7 billion aggregate principal amount of our
corporate debt, including $1.3 billion principal amount of the 2017 Notes and $0.4 billion principal amount of the
2011 Notes, for an equal principal amount of newly-issued non-interest-bearing convertible debentures due 2019.

Derivative—A financial instrument or other contract, the price of which is directly dependent upon the
value of one or more underlying securities, interest rates or any agreed upon pricing index. Derivatives cover a
wide assortment of financial contracts, including forward contracts, options and swaps.

DIF—Deposit Insurance Fund.

Enterprise interest-bearing liabilities—Liabilities such as customer deposits, repurchase agreements, FHLB
advances and other borrowings, certain customer credit balances and securities loaned programs on which the
Company pays interest; excludes customer money market balances held by third parties.

Enterprise interest-earning assets—Consists of the primary interest-earning assets of the Company and
includes: loans, available-for-sale securities, held-to-maturity securities, margin receivables, trading securities,
securities borrowed balances and cash and investments required to be segregated under regulatory guidelines that
earn interest for the Company.

Enterprise net interest income—The taxable equivalent basis net operating interest income excluding
corporate interest income and corporate interest expense and interest earned on customer cash held by third
parties.

Enterprise net interest margin—The enterprise net operating interest income divided by total enterprise

interest-earning assets.

Enterprise net interest spread—The taxable equivalent rate earned on average enterprise interest-earning
assets less the rate paid on average enterprise interest-bearing liabilities, excluding corporate interest-earning
assets and liabilities and customer cash held by third parties.

Exchange-traded funds—A fund that invests in a group of securities and trades like an individual stock on

an exchange.

Fair value—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.

Fair value hedge—A derivative instrument designated in a hedging relationship that mitigates exposure to

changes in the fair value of a recognized asset or liability or a firm commitment.

Fannie Mae—Federal National Mortgage Association.

FASB—Financial Accounting Standards Board.

FDIC—Federal Deposit Insurance Corporation.

FHLB—Federal Home Loan Bank.

FICO—Fair Isaac Credit Organization.

FINRA—Financial Industry Regulatory Authority.

Fixed Charge Coverage Ratio—Net income (loss) before taxes, depreciation and amortization and corporate
interest expense divided by corporate interest expense. This ratio indicates the Company’s ability to satisfy fixed
financing expenses.

Freddie Mac—Federal Home Loan Mortgage Corporation.

FSA—United Kingdom Financial Services Authority.

Generally Accepted Accounting Principles (“GAAP”)—Accounting principles generally accepted in the

United States of America.

Ginnie Mae—Government National Mortgage Association.

IFRS—International Financial Reporting Standards.

Interest rate cap—An options contract that puts an upper limit on a floating exchange rate. The writer of the
cap has to pay the holder of the cap the difference between the floating rate and the upper limit when that upper
limit is breached. There is usually a premium paid by the buyer of such a contract.

Interest rate floor—An options contract that puts a lower limit on a floating exchange rate. The writer of
the floor has to pay the holder of the floor the difference between the floating rate and the lower limit when that
lower limit is breached. There is usually a premium paid by the buyer of such a contract.

Interest rate swaps—Contracts that are entered into primarily as an asset/liability management strategy to
reduce interest rate risk. Interest rate swap contracts are exchanges of interest rate payments, such as fixed-rate
payments for floating-rate payments, based on notional principal amounts.

LIBOR—London Interbank Offered Rate. LIBOR is the interest rate at which banks borrow funds from

other banks in the London wholesale money market (or interbank market).

Long-term investor—The customer group that includes those who invest for the long term.

LTV—Loan-to-value.

NASAA—North American Securities Administrators Association.

NASDAQ—National Association of Securities Dealers Automated Quotations.

Net new customer asset flows—The total inflows to all new and existing customer accounts less total
outflows from all closed and existing customer accounts, excluding the effects of market movements in the value
of customer assets.

Net Present Value of Equity (“NPVE”)—The present value of expected cash inflows from existing assets,
minus the present value of expected cash outflows from existing liabilities, plus the expected cash inflows and
outflows from existing derivatives and forward commitments. This calculation is performed for E*TRADE Bank.

NOLs—Net operating losses.

Nonperforming assets—Assets that do not earn income, including those originally acquired to earn income
(nonperforming loans) and those not intended to earn income (REO). Loans are classified as nonperforming
when they are no longer accruing interest, which includes loans that are 90 days past due and TDRs that are on
nonaccrual status for all classes of loans.

Notional amount—The specified dollar amount underlying a derivative on which the calculated payments

are based.

NYSE—New York Stock Exchange.

OCC—Office of the Comptroller of the Currency.

Operating margin—Income (loss) before other income (expense), income tax benefit and discontinued

operations.

Options—Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to
either purchase or sell the associated financial instrument at a set price during a period or at a specified date in
the future.

OTTI—Other-than-temporary impairment.

OTS—Office of Thrift Supervision.

Real estate owned (“REO”) and other repossessed assets—Ownership of real property by the Company,

generally acquired as a result of foreclosure or repossession.

Recovery—Cash proceeds received on a loan that had been previously charged off.

Repurchase agreement—An agreement giving the seller of an asset the right or obligation to buy back the
same or similar securities at a specified price on a given date. These agreements are generally collateralized by
mortgage-backed or investment-grade securities.

Retail deposits—Balances of customer cash held at the Bank; excludes brokered certificates of deposit.

Return on average total assets—Annualized net income divided by average assets.

Return on average total shareholders’ equity—Annualized net income divided by average shareholders’

equity.

Risk-weighted assets—Primarily computed by the assignment of specific risk-weightings assigned by the

regulators to assets and off-balance sheet instruments for capital adequacy calculations.

S&P—Standard & Poor’s.

SEC—U.S. Securities and Exchange Commission.

Special mention loans—Loans where a borrower’s past credit history casts doubt on their ability to repay a

loan. Loans are classified as special mention when loans are between 30 and 89 days past due.

Stock plan trades—Trades that originate from our corporate services business, which provides software and
services to assist corporate customers in managing their equity compensation plans. The trades typically occur
when an employee of a corporate customer exercises a stock option or sells restricted stock.

Sweep deposit accounts—Accounts with the functionality to transfer brokerage cash balances to and from a

FDIC insured account at the banking subsidiaries.

Sub-prime—Defined as borrowers with FICO scores less than 620 at the time of origination.

Taxable equivalent

interest adjustment—The operating interest

income earned on certain assets is
completely or partially exempt from federal and/or state income tax. These tax-exempt instruments typically
yield lower returns than a taxable investment. To provide more meaningful comparison of yields and margins for
all interest-earning assets, the interest income earned on tax exempt assets is increased to make it fully equivalent
to interest income on other taxable investments. This adjustment is done for the analytic purposes in the net
enterprise interest income/spread calculation and is not made on the consolidated statement of income (loss), as
that is not permitted under GAAP.

Tier I capital—Adjusted equity capital used in the calculation of capital adequacy ratios. Tier I capital
equals: total shareholders’ equity, plus/(less) unrealized losses (gains) on available-for-sale securities and cash
flow hedges and qualifying restricted core capital elements, less disallowed servicing and deferred tax assets,
goodwill and certain other intangible assets.

Troubled Debt Restructuring (“TDR”)—A loan modification that involves granting an economic concession

to a borrower who is experiencing financial difficulty.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about market risk disclosure includes forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements as a result of certain factors,
including, but not limited to, those set forth in Item 1A. Risk Factors in this report. Market risk is exposure to
changes in interest rates, foreign exchange rates and equity and commodity prices. Exposure to interest rate risk
is related primarily to interest-earning assets and interest-bearing liabilities.

Interest Rate Risk

The management of interest rate risk is essential to profitability. Interest rate risk is exposure to changes in
interest rates. In general, we manage interest rate risk by balancing variable-rate and fixed-rate assets and
liabilities and we utilize derivatives in a way that reduces overall exposure to changes in interest rates. In recent
years, we have managed interest rate risk to achieve a minimum to moderate risk profile with limited exposure to
earnings volatility resulting from interest rate fluctuations. Exposure to interest rate risk requires management to
make complex assumptions regarding maturities, market interest rates and customer behavior. Changes in
interest rates, including the following, could impact interest income and expense:

•

Interest-earning assets and interest-bearing liabilities may re-price at different times or by different
amounts creating a mismatch.

• The yield curve may steepen, flatten or change shape affecting the spread between short- and long-term

rates. Widening or narrowing spreads could impact net interest income.

• Market

interest rates may influence prepayments resulting in maturity mismatches. In addition,

prepayments could impact yields as premium and discounts amortize.

Exposure to market risk is dependent upon the distribution and composition of interest-earning assets,
interest-bearing liabilities and derivatives. The differing risk characteristics of each product are managed to
mitigate our exposure to interest rate fluctuations. At December 31, 2011, 90% of our total assets were enterprise
interest-earning assets.

At December 31, 2011, approximately 66% of total assets were residential real estate loans and
available-for-sale and held-to-maturity mortgage-backed securities. The values of these assets are sensitive to
changes in interest rates, as well as expected prepayment levels. As interest rates increase, fixed rate residential
mortgages and mortgage-backed securities tend to exhibit lower prepayments. The inverse is true in a falling rate
environment.

When real estate loans prepay, unamortized premiums are written off. Depending on the timing of the
prepayment, the write-offs of unamortized premiums may result in lower than anticipated yields. The ALCO
reviews estimates of the impact of changing market rates on prepayments. This information is incorporated into
our interest rate risk management strategy.

Our liability structure consists of two central sources of funding: deposits and wholesale borrowings. Cash
provided to us through deposits is the primary source of funding. Key deposit products include sweep accounts,
complete savings accounts and other money market and savings accounts. Wholesale borrowings include
securities sold under agreements to repurchase and FHLB advances. Other sources of funding include customer
payables, which is customer cash contained within our broker-dealers, and corporate debt issued by the parent
company.

Deposit accounts and customer payables tend to be less rate-sensitive than wholesale borrowings.
Agreements to repurchase securities re-price as agreements reset. Sweep accounts, complete savings accounts
and other money market and savings accounts re-price at management’s discretion. FHLB advances and
corporate debt generally have fixed rates.

Derivative Instruments

We use derivative instruments to help manage interest rate risk. Interest rate swaps involve the exchange of
fixed-rate and variable-rate interest payments between two parties based on a contractual underlying notional
amount, but do not involve the exchange of the underlying notional amounts. Option products are utilized
primarily to decrease the market value changes resulting from the prepayment dynamics of the mortgage
portfolio, as well as to protect against increases in funding costs. The types of options employed include Cap
Options (“Caps”), Floor Options (“Floors”), “Payor Swaptions” and “Receiver Swaptions”. Caps mitigate the
market risk associated with increases in interest rates while Floors mitigate the risk associated with decreases in
market interest rates. Similarly, Payor and Receiver Swaptions mitigate the market risk associated with the
respective increases and decreases in interest rates. See derivative instruments discussion at Note 7—Accounting
for Derivative Instruments and Hedging Activities in Item 8. Financial Statements and Supplementary Data.

Scenario Analysis

Scenario analysis is an advanced approach to estimating interest rate risk exposure. Under the NPVE
approach, the present value of all existing assets, liabilities, derivatives and forward commitments are estimated
and then combined to produce a NPVE figure. The sensitivity of this value to changes in interest rates is then
determined by applying alternative interest rate scenarios, which include, but are not limited to, instantaneous
parallel shifts up 100, 200 and 300 basis points and down 100 basis points. The NPVE method is used at the
E*TRADE Bank level and not for the Company. E*TRADE Bank had 99% of enterprise interest-earning assets
at both December 31, 2011 and 2010 and held 98% of enterprise interest-bearing liabilities at both December 31,
2011 and 2010. The sensitivity of NPVE at December 31, 2011 and 2010 and the limits established by
E*TRADE Bank’s Board of Directors are listed below (dollars in millions):

Parallel Change in Interest Rates (basis points)(1)

Amount Percentage Amount Percentage Board Limit

Change in NPVE

December 31, 2011

December 31, 2010

+300
+200
+100
-100

$ (18.7)
$ 120.2
$ 153.6
$(324.0)

(0.5)% $ (88.5)
3.4% $ (37.0)
4.4% $
8.0
(9.2)% $(147.5)

(2.7)%
(1.1)%
0.2%
(4.4)%

(25)%
(15)%
(10)%
(10)%

(1) On December 31, 2011 and 2010, the yield for the three-month treasury bill was 0.02% and 0.12%, respectively. As a
result, the requirements of the NPV Model were temporarily modified, resulting in the removal of the minus 200 and 300 basis points
scenarios for the periods ended December 30, 2011 and 2010.

Under criteria published by its regulator, E*TRADE Bank’s overall

interest rate risk exposure at
December 31, 2011 was characterized as “minimum.” We actively manage interest rate risk positions. As interest
rates change, we will re-adjust our strategy and mix of assets, liabilities and derivatives to optimize our position.
For example, a 100 basis points increase in rates may not result in a change in value as indicated above. The
ALCO monitors E*TRADE Bank’s interest rate risk position.

Other Market Risk

Equity Security Risk

Equity securities risk is the risk of potential loss from investing in public and private equity securities. Our
market maker facilitates customer orders and carries equity security positions on a daily basis. From time to time,
we may carry large positions in securities of a single issuer or issuers engaged in a specific industry. As of
December 31, 2011, we held securities with a fair value of $53.6 million in long positions and $48.3 million in
short positions, for a net exposure of $5.3 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of E*TRADE Financial Corporation is responsible for establishing and maintaining
adequate internal control over financial reporting. E*TRADE Financial Corporation’s internal control system
was designed to provide reasonable assurance to the company’s management and board of directors regarding the
preparation and fair presentation of published financial statements. Internal control over financial reporting is
defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the company’s principal executive and principal financial officers and
effected by the company’s board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP and includes those policies and procedures that:

•

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

E*TRADE Financial Corporation’s management assessed the effectiveness of its internal control over
financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated
Framework.” Based on management’s assessment, management believes as of December 31, 2011,
that
E*TRADE Financial Corporation’s internal control over financial reporting is effective based on those criteria.

E*TRADE Financial Corporation’s Independent Registered Public Accounting Firm, Deloitte & Touche
LLP, has issued an audit report regarding E*TRADE Financial Corporation’s internal control over financial
reporting. The report of Deloitte & Touche LLP appears on the next page.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
E*TRADE Financial Corporation
New York, New York

We have audited the internal control over financial reporting of E*TRADE Financial Corporation and
subsidiaries (the “Company”) as of December 31, 2011, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2011, based on the criteria established in Internal Control–Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year ended December 31, 2011 of the
Company and our report dated February 23, 2012 expressed an unqualified opinion on those consolidated
financial statements and included an explanatory paragraph regarding the Company’s adoption of new
accounting guidance.

/s/ Deloitte & Touche LLP

McLean, Virginia
February 23, 2012

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
E*TRADE Financial Corporation
New York, New York

We have audited the accompanying consolidated balance sheets of E*TRADE Financial Corporation and
subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of
income (loss), comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2011. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of E*TRADE Financial Corporation and subsidiaries as of December 31, 2011 and 2010, and the results
of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in
conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 5 and 16 to the consolidated financial statements, the Company adopted the

accounting guidance, Recognition and Presentation of Other-Than-Temporary Impairments, on April 1, 2009.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2011, based on the
criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 23, 2012 expressed an unqualified
opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

McLean, Virginia
February 23, 2012

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (LOSS)
(In thousands, except per share amounts)

Revenue:

Operating interest income
Operating interest expense

Net operating interest income

Commissions
Fees and service charges
Principal transactions
Gains on loans and securities, net
Other-than-temporary impairment (“OTTI”)
Less: noncredit portion of OTTI recognized into (out of) other

comprehensive income (loss) (before tax)

Net impairment

Other revenues

Total non-interest income

Total net revenue

Provision for loan losses
Operating expense:

Year Ended December 31,

2011

2010

2009

$ 1,532,339
(312,380)

$ 1,546,713
(320,430)

$ 1,832,558
(571,956)

1,219,959

1,226,283

1,260,602

436,243
130,452
105,359
120,233
(9,190)

(5,717)

(14,907)
39,260

816,640

431,000
142,377
103,346
166,212
(41,510)

3,840

(37,670)
46,327

851,592

547,993
192,516
88,053
169,106
(232,139)

143,044

(89,095)
47,841

956,414

2,036,599

2,077,875

440,614

779,412

2,217,016

1,498,112

333,646
147,052
145,172
105,442
89,672
68,840
67,335
89,583
26,151
7,706
154,305

325,044
147,493
132,150
77,728
81,177
70,915
73,342
87,931
28,475
14,346
103,976

366,232
170,711
114,399
94,258
78,718
78,360
84,381
83,337
29,737
20,652
122,544

Total operating expense

1,234,904

1,142,577

1,243,329

Income (loss) before other income (expense) and income tax expense

(benefit)

Other income (expense):

Corporate interest income
Corporate interest expense
Gains (losses) on sales of investments, net
Gains (losses) on early extinguishment of debt
Equity in loss of investments and venture funds

Total other income (expense)
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)

Net income (loss)

Basic earnings (loss) per share
Diluted earnings (loss) per share
Shares used in computation of per share data:

Basic
Diluted

361,081

155,886

(524,425)

702
(177,829)
44
3,091
(1,759)

(175,751)
185,330
28,629

6,188
(167,130)
2,655
—
(740)

(159,027)
(3,141)
25,331

860
(282,688)
(1,714)
(1,018,848)
(8,616)

(1,311,006)
(1,835,431)
(537,669)

$ 156,701

$
$

0.59
0.54

$
$

(28,472) $ (1,297,762)

(0.13) $
(0.13) $

(11.85)
(11.85)

267,291
289,822

211,302
211,302

109,544
109,544

See accompanying notes to consolidated financial statements

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(In thousands, except share data)

ASSETS

Cash and equivalents
Cash and investments required to be segregated under federal or other regulations
Trading securities
Available-for-sale securities (includes securities pledged to creditors with the right
to sell or repledge of $3,916,927 and $5,621,156 at December 31, 2011 and

December 31,

2011

2010

$ 2,099,839
1,275,587
54,372

$ 2,374,346
609,510
62,173

2010, respectively)

15,651,493

14,805,677

Held-to-maturity securities (fair value of $6,282,989 and $2,422,335 at

December 31, 2011 and 2010, respectively; includes securities pledged to
creditors with the right to sell or repledge of $2,092,570 and $884,214 at
December 31, 2011 and 2010, respectively)

Margin receivables
Loans receivable, net (net of allowance for loan losses of $822,816 and $1,031,169

at December 31, 2011 and 2010, respectively)

Investment in FHLB stock
Property and equipment, net
Goodwill
Other intangibles, net
Other assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Deposits
Securities sold under agreements to repurchase
Customer payables
FHLB advances and other borrowings
Corporate debt
Other liabilities

Total liabilities

Commitments and contingencies (see Note 21)

Shareholders’ equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at December 31,
2011 and 2010; shares issued and outstanding: 285,368,075 and 220,840,821

at December 31, 2011 and 2010, respectively

Additional paid-in-capital (“APIC”)
Accumulated deficit
Accumulated other comprehensive loss

Total shareholders’ equity

Total liabilities and shareholders’ equity

6,079,512
4,826,256

2,462,710
5,120,575

12,332,807
140,183
299,693
1,934,232
285,805
2,960,673

15,121,919
164,381
302,658
1,939,976
325,403
3,083,673

$47,940,452

$46,373,001

$26,459,985
5,015,499
5,590,858
2,736,935
1,493,552
1,715,673

$25,240,297
5,888,249
5,020,086
2,731,714
2,145,881
1,294,329

43,012,502

42,320,556

2,854
7,306,862
(1,995,137)
(386,629)

2,208
6,640,715
(2,151,838)
(438,640)

4,927,950

4,052,445

$47,940,452

$46,373,001

See accompanying notes to the consolidated financial statements

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)

Net income (loss)
Other comprehensive income (loss)

Available-for-sale securities:

Year Ended December 31,

2011

2010

2009

$ 156,701

$(28,472) $(1,297,762)

OTTI, net(1)
Noncredit portion of OTTI reclassification (into) out of other

comprehensive income (loss), net(2)

Unrealized gains, net(3)
Reclassification into earnings, net(4)

Net change from available-for-sale securities

5,709

25,662

133,179

3,589
268,405
(78,060)

199,643

(2,320)
74,826
(98,408)

(91,246)
160,398
(94,743)

(240)

107,588

Cash flow hedging instruments:

Unrealized gains (losses), net(5)
Reclassification into earnings, net(6)

Net change from cash flow hedging instruments

Foreign currency translation gains (losses), net

Other comprehensive income (loss)

Comprehensive income (loss)

(216,302)
66,847

(77,724)
47,774

(149,455)

(29,950)

1,823

(4,320)

101,886
37,055

138,941

2,158

52,011

(34,510)

248,687

$ 208,712

$(62,982) $(1,049,075)

(1) Amounts are net of benefit from income taxes of $3.5 million, $15.8 million and $80.2 million for the years ended December 31, 2011,

2010 and 2009, respectively.

(2) Amounts are net of benefit from income taxes of $2.1 million, $1.5 million and $51.8 million for the years ended December 31, 2011,

2010 and 2009, respectively.

(3) Amounts are net of provision for income taxes of $161.0 million, $48.7 million and $96.5 million for the years ended December 31,

2011, 2010 and 2009, respectively.

(4) Amounts are net of provision for income taxes of $46.3 million, $60.2 million and $59.7 million for the years ended December 31, 2011,

2010 and 2009, respectively.

(5) Amounts are net of benefit from income taxes of $133.9 million and $40.2 million for years ended December 31, 2011 and 2010,

respectively, and net of a provision for income taxes of $59.8 million for year ended December 31, 2009.

(6) Amounts are net of benefit from income taxes of $43.3 million, $26.4 million and $22.2 million for the years ended December 31, 2011,

2010 and 2009, respectively.

See accompanying notes to the consolidated financial statements

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In thousands)

Balance, December 31, 2008
Cumulative effect of the adoption of

accounting guidance on April 1, 2009

Net loss
Other comprehensive income
Issuance of common stock
Amortization of premiums on the

convertible debentures

Conversion of convertible debentures
Exercise of stock options and related tax

effects

Issuance of restricted stock, net of

forfeitures and retirements to pay taxes

Share-based compensation
Other

Balance, December 31, 2009
Net loss
Other comprehensive income
Conversion of convertible debentures
Exercise of stock options and related tax

effects

Issuance of restricted stock, net of

forfeitures and retirements to pay taxes

Share-based compensation
Claims settlement under Section 16(b)
Other

Common Stock

Shares Amount

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Loss

Total
Shareholders’
Equity

56,352 $ 564 $4,069,353 $ (845,767) $(632,654) $ 2,591,496

—
—
—
62,095

—
69,657

—
—
—
621

—
697

—
20,163
— (1,297,762)
—
732,497

—
—

707,224
720,233

—

(9,456)

507
—
786

—
7

(3,189)
46,184
12,311

(20,163)
—

248,687

—

—
—

—

—
—
—

—

(1,297,762)
248,687
733,118

707,224
720,930

(9,456)

(3,184)
46,184
12,318

—
—

—

—
—
—

189,397 $1,894 $6,275,157 $(2,123,366) $(404,130) $ 3,749,555
(28,472)
(34,510)
316,983

—
(34,510)
—

(28,472)
—
—

—
—
30,653

—
—
306

316,677

—
—

19 —

(4,306)

772
—
—
—

—
—
—

(7,035)
25,361
35,000
(139)

—

—
—
—
—

—

—
—
—
—

(4,306)

(7,027)
25,361
35,000
(139)

Balance, December 31, 2010

220,841 $2,208 $6,640,715 $(2,151,838) $(438,640) $ 4,052,445

See accompanying notes to the consolidated financial statements

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY—(Continued)
(In thousands)

Balance, December 31, 2010
Net income
Other comprehensive income
Conversion of convertible

debentures

Exercise of stock options and

related tax effects

Issuance of restricted stock, net of
forfeitures and retirements to
pay taxes

Share-based compensation
Other

Common Stock

Amount

Additional
Paid-in
Capital

Accumulated
Deficit

220,841
—
—

$2,208
—
—

$6,640,715
—
—

$(2,151,838)
156,701
—

Accumulated
Other
Comprehensive
Loss

$(438,640)

—
52,011

Total
Shareholders’
Equity

$4,052,445
156,701
52,011

63,918

639

660,307

(2,882)

567
—
—

6
—
—

(5,719)
14,456
(15)

—

—
—
—

—

—
—
—

660,946

(2,881)

(5,713)
14,456
(15)

Balance, December 31, 2011

285,368

$2,854

$7,306,862

$(1,995,137)

$(386,629)

$4,927,950

See accompanying notes to the consolidated financial statements

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided

by operating activities:

Provision for loan losses
Depreciation and amortization (including discount

amortization and accretion)

Net impairment, gains on loans and securities, net and

(gains) losses on sales of investments, net
Equity in loss of investments and venture funds
(Gains) losses on early extinguishment of debt
Share-based compensation
Deferred taxes
Other

Net effect of changes in assets and liabilities:

(Increase) decrease in cash and investments required to be

segregated under federal or other regulations

Decrease (increase) in margin receivables
Increase in customer payables
Proceeds from sales of loans held-for-sale
Originations of loans held-for-sale
Proceeds from sales, repayments and maturities of trading

securities

Purchases of trading securities
Decrease (increase) in other assets
(Decrease) increase in other liabilities

Year Ended December 31,

2011

2010

2009

156,701

(28,472) $ (1,297,762)

440,614

779,412

1,498,112

340,691

339,085

345,969

(105,370)
1,759
(3,091)
14,456
7,895
4,806

(666,077)
294,319
570,772
123,441
(129,654)

1,926,439
(1,909,565)
32,787
(4,968)

(131,197)
740
—
25,361
(86,199)
(8,600)

(78,297)
8,616
1,018,848
46,184
(488,689)
(4,480)

823,626
(1,366,093)
136,525
154,603
(138,043)

998,202
(1,023,089)
369,720
203,714

(394,523)
(1,023,373)
1,346,736
118,100
(125,650)

1,229,635
(1,207,151)
(265,797)
245,479

Net cash provided by operating activities

1,095,955

1,049,295

971,957

Cash flows from investing activities:

Purchases of available-for-sale securities
Proceeds from sales, maturities of and principal payments on

available-for-sale securities

Purchases of held-to-maturity securities
Proceeds from maturities of and principal payments on

held-to-maturity securities
Net decrease in loans receivable
Capital expenditures for property and equipment
Proceeds from sale of REO and repossessed assets
Net cash flow from derivatives hedging assets
Other

(10,251,611)

(16,981,702)

(22,370,041)

9,929,506
(4,040,208)

15,681,935
(2,626,409)

19,945,842
—

408,674
2,201,838
(89,410)
156,991
14,899
39,147

160,590
2,745,200
(82,076)
213,926
(53,604)
(130,714)

—

3,555,843
(86,195)
156,783
991
(5,000)

Net cash (used in) provided by investing activities

$ (1,630,174) $ (1,072,854) $ 1,198,223

See accompanying notes to the consolidated financial statements

100

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS-(Continued)
(In thousands)

Cash flows from financing activities:
Net increase (decrease) in deposits
Sale of deposits
Net decrease in securities sold under agreements to repurchase
Advances from FHLB
Payments on advances from FHLB
Net proceeds from issuance of senior notes
Payments on senior notes
Proceeds from issuance of common stock
Net cash flow from derivatives hedging liabilities
Other

Year Ended December 31,

2011

2010

2009

$ 1,219,455

—

(872,750)
2,220,000
(2,250,000)
427,331
(425,956)

—
(41,292)
(17,076)

626,291
(980,549)
(552,793)
2,350,000
(2,350,000)

$ (539,596)

—

(919,784)
3,400,000
(5,000,000)

—
—
—

(218,185)
39,106

—
—
733,118
(161,074)
(75,061)

Net cash provided by (used in) financing activities

259,712

(1,086,130)

(2,562,397)

Effect of exchange rates on cash

Decrease in cash and equivalents
Cash and equivalents, beginning of period

Cash and equivalents, end of period

Supplemental disclosures:

Cash paid for interest
(Refund received) cash paid for income taxes
Non-cash investing and financing activities:

Conversion of convertible debentures to common stock
Transfers from loans to other real estate owned and

repossessed assets

Reclassification of loans held-for-investment to loans

held-for-sale

Transfers from loans to available-for-sale securities
Convertible debentures issued in connection with the Debt

Exchange

Capitalized interest in the form of 2017 Notes
Issuance of common stock upon acquisition

—

797

21,606

(274,507)
2,374,346

(1,108,892)
3,483,238

(370,611)
3,853,849

$ 2,099,839

$ 2,374,346

$ 3,483,238

$
$

$
$
$

435,776

$
(6,606) $

425,211
$
(78,734) $

665,027
19,342

660,946

180,964

316,983

314,514

— $
— $

252,627
222,729

$
$

720,930

272,306

389,337
—

— $
— $
— $

— $ 1,741,871
183,230
— $
9,000
— $

See accompanying notes to the consolidated financial statements

101

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

Organization—E*TRADE Financial Corporation is a financial services company that provides online
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 and savings
products, to retail investors. The Company’s most significant subsidiaries are described below:

• E*TRADE Bank is a federally chartered savings bank that provides investor-focused banking products

to retail customers nationwide and deposit accounts insured by the FDIC;

• E*TRADE Securities LLC is a registered broker-dealer and is a wholly-owned operating subsidiary of
E*TRADE Bank. It is the primary provider of brokerage products and services to the Company’s
customers.

• E*TRADE Clearing LLC is the clearing firm for the Company’s brokerage subsidiaries and is a
wholly-owned operating subsidiary of E*TRADE Bank. Its main purpose is to transfer securities from
one party to another; and

• E*TRADE Capital Markets, LLC is a registered broker-dealer and market maker.

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 holds
at least a 20% ownership interest or in which there are other indicators of significant influence are generally
accounted for by the equity method. Entities in which the Company holds less than a 20% ownership interest and
does not have the ability to exercise significant influence are generally carried at cost. Intercompany accounts
and transactions are eliminated in consolidation. The Company also evaluates its continuing involvement with
certain entities to determine if the Company is required to consolidate the entities under the variable interest
entity model. This evaluation is based on a qualitative assessment of whether the Company has both: 1) the
power to direct matters that most significantly impact the activities of the variable interest entity; and 2) the
obligation to absorb losses or the right to receive benefits of the variable interest entity that could potentially be
significant to the variable interest entity.

Certain prior period items in these consolidated financial statements have been reclassified to conform to the
current period presentation. All prior periods have been adjusted to present loans held-for-sale in the other assets
line item of the consolidated balance sheet. Loans held-for-sale were previously presented in the loans, net line
item. All prior periods have therefore been adjusted to present loans held-for-investment in the loans receivable,
net line item. 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.

The Company reports corporate interest income and corporate interest expense separately from operating
interest income and operating interest expense. The Company believes reporting these two items separately
provides a clearer picture of the financial performance of the Company’s operations than would a presentation
that combined these two items. Operating interest income and operating interest expense is generated from the
operations of the Company. Corporate debt, which is the primary source of corporate interest expense, has been
issued primarily in connection with recapitalization transactions and past acquisitions.

Similarly, the Company reports gains (losses) on sales of investments, net separately from gains on loans
and securities, net. The Company believes reporting these two items separately provides a clearer picture of the
financial performance of its operations than would a presentation that combined these two items. Gains on loans

102

and securities, net are the result of activities in the Company’s operations, namely its balance sheet management
segment. Gains (losses) on sales of investments, net relate to investments of the Company at the corporate level
and are not related to the ongoing business of the Company’s operating subsidiaries.

Related Parties—As of December 31, 2011, Citadel was one of the Company’s largest stockholders, and
based upon the Company’s review of publicly available information, the Company believes Citadel owned
approximately 9.6% of its outstanding common stock and none of its non-interest bearing convertible debentures.
In addition, Kenneth Griffin, President and CEO of Citadel, joined the Board of Directors on June 8, 2009
pursuant to a director nomination right granted to Citadel in 2007. During the year ended December 31, 2011, the
Company routed a portion of its customer equity orders in exchange-listed options and Regulation NMS
Securities to an affiliate of Citadel for order handling and execution at current market rates. Payments for these
customer equity orders represented approximately 1% of the Company’s total net revenue for the years ended
December 31, 2011, 2010 and 2009. Joseph M. Velli, Chairman and CEO of BNY ConvergEx Group, LLC,
joined the Board of Directors in January 2010. During the year ended December 31, 2011, the Company used
BNY ConvergEx Group, LLC for clearing and transfer agent services. Payments for these services represented
less than 1% of the Company’s total operating expenses for both the years ended December 31, 2011 and 2010.

Use of Estimates—The consolidated financial statements were prepared in accordance with GAAP, which
require 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 noteworthy 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 near-term changes could reasonably occur include: allowance for loan
losses; estimates of effective tax rates, deferred taxes and valuation allowances; classification and valuation of
certain investments; accounting for derivative instruments; fair value measurements; and valuation of goodwill
and other intangibles.

Financial Statement Descriptions and Related Accounting Policies—Below are descriptions and

accounting policies for certain of the Company’s financial statement categories.

Cash and Equivalents—For the purpose of reporting cash flows, the Company considers all highly liquid
investments with original or remaining maturities of three months or less at the time of purchase that are not
required to be segregated under federal or other regulations to be cash and equivalents. Cash and equivalents
included $1.0 billion and $1.4 billion at December 31, 2011 and 2010, respectively, of overnight cash deposits a
portion of which the Company is required to maintain with the Federal Reserve Bank.

Cash and Investments Required to be Segregated Under Federal or Other Regulations—Cash and
investments required to be segregated under federal or other regulations consist of cash accounts and U.S.
Treasuries. Certain cash balances are required to be segregated for the exclusive benefit of the Company’s
brokerage customers.

Trading Securities—Trading securities are bought and held principally for the purpose of selling them in the
near term and are carried at fair value. Realized and unrealized gains and losses on trading securities from
banking activities are included in the gains on loans and securities, net line item and are derived using the
specific identification method. Realized and unrealized gains and losses on trading securities from market
making activities are included in the principal transactions line item and are also derived by the specific
identification method.

Available-for-Sale Securities—Available-for-sale securities consist of debt securities, primarily residential
mortgage-backed securities, as of December 31, 2011. Securities classified as available-for-sale are carried at fair
value, with the unrealized gains and losses reflected as a component of accumulated other comprehensive loss,

103

net of tax. Realized and unrealized gains or losses on available-for-sale debt securities are computed using the
specific identification method. Interest earned on available-for-sale debt securities is included in operating interest
income. Amortization or accretion of premiums and discounts are also recognized in operating interest income
using the effective interest method over the life of the security. Realized gains and losses on available-for-sale debt
securities, other than OTTI, are included in the gains on loans and securities, net line item. Available-for-sale
securities that have an unrealized loss (impaired securities) are evaluated for OTTI at each balance sheet date.

Held-to-Maturity Securities—Held-to-maturity securities consist of debt securities, primarily residential
mortgage-backed securities. Held-to-maturity securities are carried at amortized cost based on the Company’s
positive intent and ability to hold these securities to maturity. Interest earned on held-to-maturity debt securities
is included in operating interest
income. Amortization or accretion of premiums and discounts are also
recognized in operating interest income using the effective interest method over the life of the security.
Held-to-maturity securities that have an unrecognized loss (impaired securities) are evaluated for OTTI at each
balance sheet date in a manner consistent with available-for-sale debt securities.

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. In many cases, the Company is permitted to sell or re-pledge these securities held as collateral and
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 $6.8 billion and $7.1 billion as of December 31,
2011 and 2010, respectively. Of this amount, $1.3 billion and $1.2 billion had been pledged or sold in connection
with securities loans, bank borrowings and deposits with clearing organizations as of December 31, 2011 and
2010, respectively.

Loans Receivable, Net—Loans receivable, net consists of real estate and consumer loans that management
has the intent and ability to hold for the foreseeable future or until maturity, also known as loans held for
investment. Loans held for investment are carried at amortized cost adjusted for net charge-offs, allowance for
loan losses, deferred fees or costs on originated loans and unamortized premiums or discounts on purchased
loans. Deferred fees or costs on originated loans and premiums or discounts on purchased loans are recognized in
operating interest income using the effective interest method over the contractual life of the loans and are
adjusted for actual prepayments. The Company’s classes of loans are one- to four-family, home equity and
consumer and other loans.

Nonperforming Loans—The Company classifies loans as nonperforming when they are no longer accruing
interest, which includes loans that are 90 days past due and TDRs that are on nonaccrual status for all classes of
loans. Interest previously accrued, but not collected, is reversed against current income when a loan is placed on
nonaccrual status. Interest payments received on nonperforming loans are recognized on a cash basis in operating
interest income until it is doubtful that full payment will be collected, at which point payments are applied to
principal. The recognition of deferred fees or costs on originated loans and premiums or discounts on purchased
loans in operating interest income is discontinued for nonperforming loans. Nonperforming loans, excluding
loans that were modified as a TDR, return to accrual status when the loan becomes less than 90 days past due.

Loan losses are recognized when it is probable that a loss has been incurred. The Company’s charge-off
policy for both one- to four-family and home equity loans is to assess the value of the property when the loan has
been delinquent for 180 days or it is in bankruptcy, regardless of whether or not the property is in foreclosure,
and charge-off the amount of the loan balance in excess of the estimated current value of the underlying property
less estimated costs to sell. Closed-end consumer loans are charged-off when the loan has been delinquent for
120 days or when it is determined that collection is not probable.

104

Impaired Loans—A loan is impaired when it meets the definition of a TDR. Impaired loans exclude
smaller-balance homogeneous one- to four-family, home equity and consumer and other loans that have not been
modified as TDRs and are collectively evaluated for impairment.

TDRs—Modified loans in which economic concessions were granted to borrowers experiencing financial
difficulty are considered TDRs. Upon being classified as a TDR, such loan is categorized as an impaired loan and
impairment is measured on an individual basis. Once a loan is modified as a TDR, the loan is considered
impaired until maturity regardless of whether the borrower performs under the modified terms.

The Company utilizes its own modification programs in pursuing TDRs. The various types of economic
concessions that may be granted in a TDR or trial modification typically consist of interest rate reductions,
maturity date extensions, principal forgiveness or a combination of these concessions. The Company also
processed minor modifications on a number of loans through traditional collections actions taken in the normal
course of servicing delinquent accounts. These actions typically result in an insignificant delay in the timing of
payments; therefore, the Company does not consider such activities to be economic concessions to borrowers.

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 is then classified as current and becomes a permanent modification.

Allowance for Loan Losses—The allowance for loan losses is management’s estimate of probable losses
inherent in the loan portfolio as of the balance sheet date. The Company’s segments are one- to four-family,
home equity and consumer and other loans. For loans that are not TDRs, the Company established a general
allowance. The estimate of the allowance for loan losses is based on a variety of quantitative and qualitative
factors, including the composition and quality of the portfolio; delinquency levels and trends; current and
historical charge-off and loss experience; the Company’s historical loss mitigation experience; the condition of
the real estate market and geographic concentrations within the loan portfolio; the interest rate climate; the
overall availability of housing credit; and general economic conditions. The one- to four-family and home equity
loan portfolios are separated into risk segments based on key risk factors, which include but are not limited to
loan type, loan acquisition channel, delinquency history, documentation type, LTV/CLTV ratio and borrowers’
credit scores. 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. Both
current CLTV and FICO scores are among the factors utilized to categorize the risk associated with loans and
assign a probability assumption of future default. Based upon the segmentation, the Company utilizes historical
performance data to forecast future delinquency and default for these risk segments. The Company’s consumer
and other loan portfolio is separated into risk segments by product and delinquency status. The Company utilizes
historical performance data and historical recovery rates on collateral liquidation to forecast future delinquency
and loss at the product level. The general allowance for loan losses is typically equal to management’s forecast of
loan losses in the twelve months following the balance sheet date. Management believes this level
is
representative of probable losses inherent in the loan portfolio at the balance sheet date.

105

loans. The qualitative component for the consumer and other loan portfolio was 15% of the general allowance at
December 31, 2011 and 2010. The qualitative component for the one- to four-family and home equity loan
portfolios increased from 15% of the general allowance for loan losses at December 31, 2010 to 35% at
December 31, 2011. The total qualitative factor was $124 million as of December 31, 2011. As the Company
transitions from the OTS to the OCC, it is evaluating programs and practices that were designed in accordance with
guidance from the OTS. The Company is working to align certain policies and procedures to the guidance from the
OCC and has suspended certain modification programs that will require changes. The Company increased the
qualitative reserve in 2011 to reflect additional estimated losses during the period of reduced activity in our
modification programs, as well as uncertainty around certain loans modified under our previous programs.

For modified loans accounted for as TDRs, the Company established a specific allowance. The specific
allowance for TDRs factors in the historical default rate of an individual loan before being modified as a TDR in
the discounted cash flow analysis in order to determine that specific loan’s expected impairment. For both of the
one- to four-family and home equity loan portfolio segments, each loan’s individual default experience is
analyzed in addition to the performance observed in similar seasoned TDRs in the Company’s overall TDR
program when calculating the specific allowance. A specific allowance is established to the extent that the
recorded investment exceeds the discounted cash flows of a TDR with a corresponding charge to provision for
loan losses. The specific allowance for these individually impaired loans represents the forecasted losses over the
estimated remaining life of the loan, including the economic concession to the borrower.

Investment in FHLB stock—The Company is a member of, and owns capital stock in, the FHLB system. The
FHLB provides the Company with reserve credit capacity and authorizes advances based on the security of
pledged home mortgages and other assets (principally securities that are obligations of, or guaranteed by, the
U.S. Government) provided the Company meets certain creditworthiness standards. FHLB advances, included in
the FHLB advances and other borrowings line item, is a wholesale funding source of E*TRADE Bank. As a
condition of its membership in the FHLB, the Company is required to maintain a FHLB stock investment. The
Company accounts for its investment in FHLB stock as a cost method investment.

Property and Equipment, Net—Property and equipment are carried at cost and depreciated on a straight-line
basis over their estimated useful lives, generally three to seven years. Leasehold improvements are amortized
over the lesser of their estimated useful lives or lease terms. Buildings are depreciated over the lesser of their
estimated useful lives or forty years. Land is carried at cost. An impairment loss is recognized only if the
carrying amount of the long-lived asset is not recoverable and exceeds its fair value.

The costs of internally developed software that qualify for capitalization are included in the property and
equipment, net line item. For qualifying internal-use software costs, capitalization begins when the conceptual
formulation, design and testing of possible software project alternatives are complete and management authorizes
and commits to funding the project. The Company does not capitalize pilot projects and projects where it
believes that future economic benefits are less than probable. Technology development costs incurred in the
development and enhancement of software used in connection with services provided by the Company that do
not otherwise qualify for capitalization treatment are expensed as incurred.

Goodwill and Other Intangibles, Net—Goodwill and other intangibles, net represents the excess of the
purchase price over the fair value of net tangible assets acquired through the Company’s business combinations.
The Company tests goodwill and other intangible assets for impairment on at least an annual basis or when
events or changes indicate the carrying value of an asset may not be recoverable. The Company evaluates the
remaining useful lives of intangible assets with finite lives each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of amortization.

Real Estate Owned and Repossessed Assets—Included in the other assets line item in the consolidated
balance sheet is real estate acquired through foreclosure and repossessed consumer assets. Real estate properties
acquired through foreclosures, commonly referred to as REO, and repossessed assets are carried at the lower of
carrying value or fair value, less estimated selling costs.

106

Income Taxes—Deferred income taxes are recorded when revenues and expenses are recognized in different
periods for financial statement purposes than for tax return purposes. Deferred tax asset or liability account
balances are calculated at the balance sheet date using current tax laws and rates in effect. Valuation allowances
are established, when necessary, to reduce deferred tax assets when it is more likely than not that a portion or all
of a given deferred tax asset will not be realized. Income tax expense (benefit) includes (i) deferred tax expense
(benefit), which generally represents the net change in the deferred tax asset or liability balance during the year
plus any change in valuation allowances and (ii) current tax expense (benefit), which represents the amount of
tax currently payable to or receivable from a taxing authority. Uncertain tax positions are only recognized to the
extent they satisfy the accounting for uncertain tax positions criteria included in the income taxes accounting
guidance, which states that in order to recognize an uncertain tax position it must be more likely than not that it
will be sustained upon examination. For uncertain tax positions, tax benefit is recognized for cases in which it is
more than fifty percent likely of being sustained on ultimate settlement. See Note 15—Income Taxes.

Securities Sold Under Agreements to Repurchase—Securities sold under agreements to repurchase the same
or similar securities, also known as repurchase agreements, are collateralized by fixed- and variable-rate
mortgage-backed securities or investment grade securities. Repurchase agreements are treated as secured
borrowings for financial statement purposes and the obligations to repurchase securities sold are therefore
reflected as liabilities in the consolidated balance sheet.

Customer Payables—Customer payables to customers and non-customers represent credit balances in
customer accounts arising from deposits of funds and sales of securities and other funds pending completion of
securities transactions. Customer payables primarily represent customer cash contained within the Company’s
broker-dealer subsidiaries. The Company pays interest on certain customer payables balances.

Comprehensive Income (Loss)—The Company’s comprehensive income (loss) is composed of net income
(loss), noncredit portion of OTTI on debt securities, unrealized gains on available-for-sale securities, the
effective portion of the unrealized gains (losses) on derivatives in cash flow hedge relationships and foreign
currency translation gains (losses), net of reclassification adjustments and related tax.

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
is recorded on the consolidated balance sheet at fair value as a freestanding asset or liability. For financial
statement purposes,
the Company’s policy is to not offset fair value amounts recognized for derivative
instruments and fair value amounts related to collateral arrangements under master netting arrangements.

Accounting for derivatives differs significantly depending on whether a derivative is designated as a hedge
and, if designated as a hedge, the type of hedge designation. Derivative instruments designated in hedging
relationships that mitigate the exposure to the variability in expected future cash flows or other forecasted
transactions are considered cash flow hedges. Derivative instruments in hedging relationships that mitigate
exposure to changes in the fair value of assets or liabilities are considered fair value hedges. The Company
formally documents at inception all relationships between hedging instruments and hedged items and the risk
management objective and strategy for each hedge transaction. Cash flow and fair value hedge ineffectiveness is
re-measured on a quarterly basis and is included in the gains on loans and securities, net line item in the
consolidated statement of income (loss). Cash flows from derivative instruments in hedging relationships are
classified in the same category on the consolidated statement of cash flows as the cash flows from the items
being hedged. The Company also recognizes certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a derivative. Gains and losses on
derivatives that are not held as accounting hedges are recognized in the gains on loans and securities, net line
item in the consolidated statement of income (loss). See Note 7—Accounting for Derivative Instruments and
Hedging Activities.

Fair Value—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. The Company determines

107

the fair value for its financial instruments and for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. In addition, the
Company determines the fair value for nonfinancial assets and nonfinancial liabilities on a nonrecurring basis as
required during impairment testing or by other accounting guidance. See Note 4—Fair Value Disclosures.

Operating Interest Income—Operating interest income is recognized as earned through holding interest-
earning assets, such as real estate loans, mortgage-backed securities, margin receivables, investment securities,
securities borrowed balances and cash and equivalents, including segregated cash and investments. Operating
interest income also includes the impact of the Company’s derivative transactions related to interest-earning
assets.

Operating Interest Expense—Operating interest expense is recognized as incurred primarily through holding
interest-bearing liabilities, including repurchase agreements, FHLB advances and other borrowings, customer
cash and deposits and securities loaned balances. Operating interest expense also includes the impact of the
Company’s derivative transactions related to interest-bearing liabilities.

Commissions—Commissions are derived primarily from the Company’s customers and are impacted by

both trade types and trade mix. Commissions from securities transactions are recognized on a trade-date basis.

Fees and Service Charges—Fees and service charges primarily consist of order flow revenue. Fees and
service charges also include 12b-1 fees, advisor management fee revenue, reorganization fees and foreign
exchange margin revenue. Order flow revenue is accrued in the same period in which the related securities
transactions are completed or related services are rendered.

Principal Transactions—Principal transactions consist of revenue from market making activities. Market
making activities are the matching of buyers and sellers of securities and include transactions where the
Company will purchase securities for its balance sheet with the intention of resale to transact the customer’s buy
or sell order. Principal transactions earned on the Company’s market making activities are recorded on a trade
date basis.

Gains on Loans and Securities, Net—Gains on loans and securities, net includes gains or losses resulting
from the sale of available-for-sale securities; gains or losses on trading securities; gains or losses resulting from
sales of loans; hedge ineffectiveness; and gains or losses on derivative instruments that are not accounted for as
hedging instruments. Gains or losses resulting from the sale of available-for-sale securities are generally
recognized at the trade-date, based on the difference between the anticipated proceeds and the amortized cost of
the specific securities sold.

Other-than-temporary Impairment (“OTTI”)—The Company considers OTTI for an available-for-sale or
held-to-maturity debt security to have occurred if one of the following conditions are met: the Company intends
to sell the impaired debt security; it is more likely than not that the Company will be required to sell the impaired
debt security before recovery of the security’s amortized cost basis; or the Company does not expect to recover
the entire amortized cost basis of the security. The Company’s evaluation of whether it intends to sell an
impaired debt security considers whether management has decided to sell the security as of the balance sheet
date. The Company’s evaluation of whether it is more likely than not that the Company will be required to sell an
impaired debt security before recovery of the security’s amortized cost basis considers the likelihood of sales that
involve legal, regulatory or operational requirements. For impaired debt securities that the Company does not
intend to sell and it is not more likely than not that the Company will be required to sell before recovery of the
security’s amortized cost basis, the Company uses both qualitative and quantitative valuation measures to
evaluate whether the Company expects to recover the entire amortized cost basis of the security. The Company
considers all available information relevant to the collectability of the security, including credit enhancements,
security structure, vintage, credit ratings and other relevant collateral characteristics.

108

If the Company intends to sell an impaired debt security or if it is more likely than not that the Company
will be required to sell the impaired debt security before recovery of the security’s amortized cost basis, the
Company will recognize OTTI in earnings equal to the entire difference between the security’s amortized cost
basis and the security’s fair value. If the Company does not intend to sell the impaired debt security and it is not
more likely than not that the Company will be required to sell the impaired debt security before recovery of its
amortized cost basis but the Company does not expect to recover the entire amortized cost basis of the security,
the Company will separate OTTI into two components: 1) the amount related to credit loss, recognized in
earnings; and 2) the noncredit portion of OTTI, recognized through other comprehensive income (loss).

Net Impairment—Net impairment includes OTTI net of the noncredit portion of OTTI on debt securities

recognized through other comprehensive income (loss) (before tax).

Other Revenues—Other revenues primarily consists of fees from software and services for managing equity
compensation plans. Other revenues also includes revenue ancillary to the Company’s customer transactions and
income from the cash surrender value of BOLI. Employee stock option management fees are recognized in
accordance with applicable accounting guidance, including software revenue recognition accounting guidance.

Share-Based Payments—The Company records share-based payments expense in accordance with the stock
compensation accounting guidance. The Company records compensation cost at the grant date fair value of a
share-based payment award over the vesting period less estimated forfeitures. The underlying assumptions to
these fair value calculations are discussed in Note 18—Employee Share-Based Payments and Other Benefits.
Additionally, the Company elected to use the alternative transition method provided for calculating the tax
effects of share-based compensation pursuant to the stock compensation accounting guidance. Share-based
payments expense is included in the compensation and benefits line item.

Advertising and Market Development—Advertising production costs are expensed when the initial

advertisement is run.

Net Income (Loss) Per Share—Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted-average common shares outstanding for the period. Diluted net income (loss) per share reflects
the potential dilution that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock. The Company excludes from the calculation of diluted net income (loss) per share
stock options, unvested restricted stock awards and units and shares related to convertible debentures that would
have been anti-dilutive.

New Accounting and Disclosure Guidance—Below is the new accounting and disclosure guidance that

relates to activities in which the Company is engaged.

Improving Disclosures about Fair Value Measurements

In January 2010, the FASB amended the disclosure guidance related to fair value measurements. The
amended disclosure guidance requires new fair value measurement disclosures and clarifies existing fair value
measurement disclosure requirements. The amended disclosure guidance requiring separate presentation of
purchases, sales, issuances and settlements of Level 3 instruments was effective January 1, 2011 for the
Company. The Company’s disclosures about fair value measurements reflect the adoption of the amended
disclosure guidance in Note 4—Fair Value Disclosures.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

In July 2010, the FASB amended the disclosure guidance for financing receivables and the allowance for
credit losses. The amendments require new and amended disclosures about nonaccrual and past due financing

109

the allowance for credit

impaired loans (individually
receivables;
evaluated for impairment); credit quality information; and modifications. The amended disclosure guidance
related to non-TDRs was effective January 1, 2011 for the Company, and the amended disclosure guidance
related to TDRs was effective July 1, 2011 for the Company. The Company’s disclosures reflect the adoption of
the amended disclosure guidance related to TDR and non-TDR information in Note 6—Loans Receivable, Net.

losses related to financing receivables;

A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring

In April 2011, the FASB amended the accounting guidance for TDRs. The amendments clarify the guidance
on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial
difficulties. The amended accounting guidance was effective July 1, 2011 for the Company, and was applied
retrospectively to January 1, 2011 for the Company. The adoption of the amended accounting guidance did not
affect the Company’s conclusion that the Company’s modification of loans through traditional collections actions
taken in the normal course of servicing delinquent accounts that typically result in an insignificant delay in the
timing of payments are not TDRs. The adoption of the amended accounting guidance did not have a material
impact on the Company’s financial condition, results of operations, or cash flows.

Reconsideration of Effective Control for Repurchase Agreements

In April 2011, the FASB amended the accounting guidance for repurchase agreements. The amendments
change the effective control assessment by removing the criterion that required the transferor to have the ability
to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the
transferee, and the collateral maintenance guidance related to that criterion. The amended accounting guidance
became effective January 1, 2012 for the Company, and will be applied prospectively to transactions or
modifications of existing transactions that occur on or after the effective date. The adoption of the amended
accounting guidance did not have a material impact on the Company’s financial condition, results of operations,
or cash flows.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs

In May 2011,

the FASB amended the accounting and disclosure guidance related to fair value
measurements. The amended guidance will
in common fair value measurement and disclosure
requirements in GAAP and IFRSs. The amended guidance changes the wording used to describe certain
requirements in GAAP for measuring fair value and for disclosing information about fair value measurement.
The amended accounting guidance became effective January 1, 2012 for the Company, and will be applied
prospectively. The adoption of the amended guidance did not have a material impact on the Company’s financial
condition, results of operations, or cash flows.

result

Presentation of Comprehensive Income

In June 2011, the FASB amended the presentation guidance for comprehensive income. Among other
presentation changes, the amended guidance provides the option to present the total of comprehensive income,
the components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. The amended presentation
guidance became effective January 1, 2012 for the Company.

Testing Goodwill for Impairment

In September 2011, the FASB amended the guidance on testing goodwill for impairment. The amended
guidance provides an option to perform a qualitative assessment to determine whether it is more likely than not
that the fair value of a reporting unit is impaired as a basis for determining if further testing of goodwill for

110

impairment is necessary. The amended guidance became effective January 1, 2012 for the Company. The
adoption of the amended accounting guidance did not have a material impact on the Company’s financial
condition, results of operations, or cash flows.

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB amended the disclosure guidance about offsetting assets and liabilities. The
amended disclosure guidance will enable users of the Company’s financial statements to evaluate the effect or
potential effect of netting arrangements on the Company’s financial position. This includes the effect or potential
effect of rights of setoff between recognized assets and recognized liabilities within the scope of amended
disclosure guidance, such as derivative instruments and other financial instruments. The amended disclosure
guidance will be effective for annual and interim periods beginning on January 1, 2013 for the Company and will
be applied retrospectively for all comparative periods presented. The adoption of the amended accounting
guidance will not have a material impact on the Company’s financial condition, results of operations, or cash
flows.

NOTE 2—FACILITY RESTRUCTURING AND OTHER EXIT ACTIVITIES

Restructuring and other exit activities liabilities are included in other liabilities in the consolidated balance
sheet. The following table summarizes the changes in the facility restructuring and other exit activities liabilities
for the years ended December 31, 2011 and 2010 (dollars in thousands):

Beginning balance
Facility restructuring and other exit activities
Cash payments
Non-cash charges (1)

Year Ended December 31,

2011

2010

$10,371
7,706
(9,920)
(4,096)

$ 18,529
14,346
(18,591)
(3,913)

Total facility restructuring and other exit activities liabilities

$ 4,061

$ 10,371

(1) Non-cash charges primarily relate to fixed assets that were written off related to the restructuring or exit activity.

The following table summarizes the expense recognized by the Company as facility restructuring and other

exit activities for the periods presented (dollars in thousands):

Restructuring of international brokerage business
Other facility restructuring and exit activities

Total facility restructuring and other exit activities

Year Ended December 31,

2011

2010

2009

$1,060
6,646

$ 6,846
7,500

$15,655
4,997

$7,706

$14,346

$20,652

Facility restructuring and other exit activities expenses are not allocated to the Company’s operating
segments but are reported as a component of the corporate/other category within the Company’s segment
information.

Exit of Non-Core Operations

International Brokerage Business

In the fourth quarter of 2009, the Company decided to restructure its international brokerage business, which
provided trading products and services through two primary channels: 1) cross-border trading, where customers
residing outside of the U.S. trade in U.S. securities; and 2) local market trading, where customers residing outside

111

of the U.S. trade in non-U.S. securities. The Company exited local market trading as it is not a key strategic
component of the Company’s global brokerage product offering. This exit did not qualify for discontinued
operations accounting as the Company has significant continuing involvement with cross-border trading in the
remaining international brokerage business.

The Company entered into agreements to sell the local market trading operations in Germany, the Nordic
region and the United Kingdom. The sale of the local market trading operations in Germany was completed in
December 2009. The Company closed the sales of the local market trading operations in the Nordic region and
United Kingdom in April 2010 and recognized a gain of $3.0 million.

As a result of the international brokerage business restructuring, the Company recognized $1.1 million, $6.8
million and $15.7 million in expense during the years ended December 31, 2011, 2010 and 2009, respectively.
These costs included $1.3 million, $2.8 million and $7.4 million in severance costs for the years ended
December 31, 2011, 2010 and 2009, respectively. These costs also included an adjustment of $0.2 million
offsetting asset write-off and other restructuring costs for the year ended December 31, 2011 along with $4.0
million and $8.3 million in asset write-off and other restructuring costs for the years ended December 31, 2010
and 2009, respectively. The Company expects to incur charges in future periods as it periodically evaluates the
estimates made in connection with this activity; however, the Company does not expect these charges to be
significant.

NOTE 3—OPERATING INTEREST INCOME AND OPERATING INTEREST EXPENSE

The following table shows the components of operating interest income and operating interest expense

(dollars in thousands):

Operating interest income:

Loans
Available-for-sale securities
Margin receivables
Held-to-maturity securities
Securities borrowed and other

Total operating interest income(1)

Operating interest expense:

Securities sold under agreements to repurchase
FHLB advances and other borrowings
Deposits
Customer payables and other

Total operating interest expense(2)

Net operating interest income

Year Ended December 31,

2011

2010

2009

692,127
421,304
221,717
136,953
60,238

$ 879,013
386,347
200,260
35,930
45,163

$1,138,116
471,087
138,510
—
84,845

1,532,339

1,546,713

1,832,558

(153,079)
(106,201)
(42,879)
(10,221)

(129,574)
(119,344)
(62,828)
(8,684)

(200,121)
(148,739)
(211,788)
(11,308)

(312,380)

(320,430)

(571,956)

$1,219,959

$1,226,283

$1,260,602

(1) Operating interest income reflects $(10.3) million, $21.9 million, and $53.9 million in income on hedges that qualify for hedge

accounting for the years ended December 31, 2011, 2010, and 2009, respectively.

(2) Operating interest expense reflects $136.7 million, $122.4 million, and $136.3 million in expense on hedges that qualify for hedge

accounting for the years ended December 31, 2011, 2010, and 2009, respectively.

112

NOTE 4—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 an entity 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—Quoted prices in active markets for identical assets or liabilities.

• 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

U.S. Treasury Securities and Agency Debentures

The fair value measurements of U.S. Treasury securities were classified as Level 1 of the fair value
hierarchy as they were based on quoted market prices in active markets. The fair value measurements of agency
debentures were classified as Level 2 of the fair value hierarchy as they were based on quoted market prices that
were derived from assumptions observable in the marketplace.

Residential Mortgage-backed Securities

The Company’s residential mortgage-backed securities portfolio was comprised of agency mortgage-backed
securities and CMOs, which represented the majority of the portfolio, and non-agency CMOs. Agency mortgage-
backed securities and CMOs are guaranteed by U.S. government sponsored and federal agencies. The majority of
the Company’s non-agency CMOs were backed by first lien mortgages and were below investment grade or
non-rated as of December 31, 2011. The weighted average coupon rates for the residential mortgage-backed
securities as of December 31, 2011 are shown in the following table:

Agency mortgage-backed securities
Agency CMOs
Non-agency CMOs

Weighted Average
Coupon Rate

3.45 %
3.48 %
3.90 %

The fair value of agency mortgage-backed securities was 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 was determined using market and income approaches 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.

113

Non-agency CMOs were valued using market and income approaches with market observable data,
including recent market transactions when available. The Company also utilized a pricing service to corroborate
the market observability of the Company’s inputs used in the fair value measurements. The valuations of
non-agency CMOs reflect the Company’s best estimate of what market participants would consider in pricing the
financial instruments. The following table presents additional information about the underlying loans and
significant inputs for the valuation of non-agency CMOs as of December 31, 2011:

Underlying loans:
Coupon rate
Maturity (years)

Significant inputs:

Yield
Default rate(1)
Loss severity
Prepayment rate

Weighted
Average

Range

3.99% 2.43%-6.83%

4%
14%
43%
7%

11-26

2% -18%
1%-65%
0%-96%
0%-37%

(1)

The default rate reflects the implied rate necessary to equate market price to the book yield given the market credit assumption.

The Company considers the price transparency for these financial instruments to be a key determinant of the
degree of judgment involved in determining the fair value. As of December 31, 2011, the majority of the
Company’s non-agency CMOs were categorized in Level 2 of the fair value hierarchy.

Other Debt Securities

The fair value measurements of other 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. The majority of the Company’s municipal bonds and corporate bonds were rated
investment grade as of December 31, 2011. 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.

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 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.

Securities Owned and Securities Sold, Not Yet Purchased

Securities transactions entered into by broker-dealer subsidiaries are included in trading securities and
securities sold, not yet purchased in the Company’s fair value disclosures. For equity securities, the Company’s
definition of actively traded is based on average daily volume and other market trading statistics. The fair value
of the majority of securities owned and securities sold, not yet purchased was determined using listed or quoted
market prices and were mostly categorized in Level 1 of the fair value hierarchy.

114

Recurring Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in

thousands):

December 31, 2011:
Assets

Trading securities
Available-for-sale securities:
Residential mortgage-backed securities:

Agency mortgage-backed securities and CMOs
Non-agency CMOs

Total residential mortgage-backed securities

Investment securities:
Agency debentures
Other agency debt securities
Municipal bonds
Corporate bonds

Total investment securities

Total available-for-sale securities

Other assets:

Derivative assets(1)

Total assets measured at fair value on a recurring

basis(2)

Liabilities

Level 1

Level 2

Level 3

Fair Value

$53,025

1,347

$ — $

54,372

—
—

—

—
—
—
—

—

13,965,712
244,447

—
97,106

13,965,712
341,553

14,210,159

97,106

14,307,265

731,280
554,194
41,069
17,685

1,344,228

—
—
—
—

—

731,280
554,194
41,069
17,685

1,344,228

15,554,387

97,106

15,651,493

66,534

—

66,534

$53,025

$15,622,268

$97,106

$15,772,399

Derivative liabilities(1)
Securities sold, not yet purchased

$ — $
48,185

358,203
86

$ — $
—

358,203
48,271

Total liabilities measured at fair value on a

recurring basis(2)

$48,185

358,289

$ — $

406,474

(1) All derivative assets and liabilities are interest rate contracts. Information related to derivative instruments is detailed in Note 7—

Accounting for Derivative Instruments and Hedging Activities.

(2) Assets and liabilities measured at fair value on a recurring basis represented 33% and less than 1% of the Company’s total assets and

total liabilities, respectively.

115

December 31, 2010:
Assets

Trading securities
Available-for-sale securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and CMOs
Non-agency CMOs

Total residential mortgage-backed securities

Investment securities:
Agency debentures
Other agency debt securities
Municipal bonds
Corporate bonds

Total investment securities

Total available-for-sale securities

Other assets:

Derivative assets(1)
Deposits with clearing organizations(2)

Total other assets measured at fair value on a

recurring basis

Total assets measured at fair value on a recurring

basis(3)

Liabilities

Level 1

Level 2

Level 3

Fair Value

$55,630

5,913

630

62,173

—
—
—

—
—
—
—
—
—

12,898,114
200,169
13,098,283

1,269,552
187,462
37,331
17,829
1,512,174
14,610,457

—
195,220
195,220

—
—
—
—
—
195,220

—
38,000

248,911
—

38,000

248,911

—
—

—

12,898,114
395,389
13,293,503

1,269,552
187,462
37,331
17,829
1,512,174
14,805,677

248,911
38,000

286,911

$93,630

$14,865,281

$195,850

$15,154,761

Derivative liabilities(1)
Securities sold, not yet purchased

$ — $

51,889

106,863
2,846

$ — $
—

106,863
54,735

Total liabilities measured at fair value on a recurring

basis(3)

$51,889

109,709

$ — $

161,598

(1) All derivative assets and liabilities are interest rate contracts. Information related to derivative instruments is detailed in Note 7—

Accounting for Derivative Instruments and Hedging Activities.

(2) Represents U.S. Treasury securities held by a broker-dealer subsidiary.
(3) Assets and liabilities measured at fair value on a recurring basis represented 33% and less than 1% of the Company’s total assets and

total liabilities, respectively.

The following tables present additional information about Level 3 assets and liabilities measured at fair

value on a recurring basis (dollars in thousands):

Balance, December 31, 2010
Realized and unrealized gains (losses):(1)

Included in earnings(2)
Included in other comprehensive income (loss)(3)

Sales
Settlements
Transfers in to Level 3(4)
Transfers out of Level 3(4)
Balance, December 31, 2011

Available-for-sale
Securities

Trading
Securities

630

(1,560)
—
(6,299)
(1,700)
8,929
—
$ —

Non-agency
CMOs

$ 195,220

(7,898)
16,089
—
(28,205)
254,637
(332,737)
$ 97,106

(1)

The majority of total realized and unrealized gains (losses) were related to instruments held at December 31, 2011.
The majority of realized and unrealized gains (losses) included in earnings are reported in the net impairment line item.
(2)
(3) All realized and unrealized gains (losses) included in other comprehensive income (loss) are reported in the net change from

available-for-sale securities line item.
The Company’s transfers in and out of Level 3 are as of the beginning of the reporting period on a quarterly basis.

(4)

116

Balance, December 31, 2009
Realized and unrealized gains (losses):(1)

Included in earnings(2)
Included in other comprehensive income (loss)(3)
Purchases, sales, other settlements and issuances, net
Transfers in to Level 3(4)
Transfers out of Level 3(4)

Available-for-sale Securities

Agency
Mortgage-
backed
Securities and
CMOs

Trading
Securities

Non-agency
CMOs

Corporate
Investments

$1,491

$ 17,972

$ 234,629

$ 173

(938)
—

—
—

—
—
—
—
(17,972)

(35,799)
80,695
(32,520)
139,088
(190,873)

—

(9)
(119)
—
(45)

Balance, December 31, 2010

$ 630

$ —

$ 195,220

$ —

(1)

(2)

(3)

(4)

The majority of total realized and unrealized gains (losses) were related to instruments held at December 31, 2010.
The majority of realized and unrealized gains (losses) included in earnings are reported in the net impairment line item.
The majority of realized and unrealized gains (losses) included in other comprehensive income (loss) are reported in the net change from
available-for-sale securities line item.
The Company’s transfers in and out of Level 3 are as of the beginning of the reporting period on a quarterly basis.

Available-for-sale Securities

Agency
Mortgage-
backed
Securities
and
CMOs

Trading
Securities

Non-agency
CMOs

Corporate
Investments

Derivative
Instruments,
Net(5)

Balance, December 31, 2008
Realized and unrealized gains (losses):(1)

Included in earnings(2)
Included in other comprehensive income

(loss)(3)

Purchases, sales, other settlements and issuances,

net

Transfers in and/or (out) of Level 3(4)

$ 33,406

$ — $304,661

$170

$(492)

2,016

—

(86,215)

—

(783)

102,346

(37,377)
3,446

4
18,751

(84,050)
(2,113)

—
—

492

—

—
—

Balance, December 31, 2009

$ 1,491

$17,972

$234,629

$173

$ —

(1)

(2)

(3)

(4)

The majority of total realized and unrealized gains (losses) were related to instruments held at December 31, 2009.
The majority of realized and unrealized gains (losses) included in earnings are reported in the net impairment line item.
The majority of realized and unrealized gains (losses) included in other comprehensive income (loss) are reported in the net change from
available-for-sale securities line item.
The Company’s transfers in and out of Level 3 are as of the beginning of the reporting period on a quarterly basis.

(5) Represents derivative assets net of derivative liabilities for presentation purposes only.

Level 3 Assets and Liabilities

Level 3 assets and liabilities included instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of
fair value requires significant management judgment or estimation. While the Company’s fair value estimates of
Level 3 instruments utilized observable inputs where available, the valuation included significant management
judgment in determining the relevance and reliability of market information considered.

117

The Company’s transfers of certain CMOs in and out of Level 3 are generally driven by changes in price
transparency for the securities. Financial instruments for which actively quoted prices or pricing parameters are
available will have a higher degree of price transparency than financial instruments that are thinly traded or not
quoted. As of December 31, 2011, less than 1% of the Company’s total assets and none of its total liabilities
represented instruments measured at fair value on a recurring basis categorized as Level 3.

Nonrecurring Fair Value Measurements

The Company records certain other assets 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
property less estimated costs to sell has been charged-off; and 2) real estate acquired through foreclosure that is
carried at the lower of the property’s carrying value or fair value, less estimated selling costs. The following table
presents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated
balance sheet as of December 31, 2011 and 2010, and for which a nonrecurring fair value measurement was
recorded during the period (dollars in thousands):

One- to four-family
Home equity

Total loans receivable measured at fair value

REO measured at fair value

December 31,

2011

2010

$823,338
61,163

$880,044
61,940

$884,501

$941,984

$ 81,505

$140,029

Loans that have been delinquent for 180 days and are charged off based on the estimated current value of
the underlying property less estimated selling costs remain classified as nonperforming loans until they complete
the foreclosure process and become REO. Property valuations for one- to four-family and home equity loans are
based on the most recent “as is” property valuation data available, which may include appraisals, automated
valuation models, prices for identical or similar properties, broker price opinions or home price indices. The
Company obtains property valuation data quarterly. If the valuation data obtained is significantly different from
the valuation previously received, the Company orders additional property valuation data to corroborate or
update the valuation. Property valuations for real estate acquired through foreclosure are based on the lowest
value of the most recent property valuation data available, which may include appraisals, listing prices or offer
prices. These fair value measurements were classified as Level 3 of the fair value hierarchy as all of the
valuations included Level 3 inputs that were significant to the estimate of fair value.

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, which is updated on a quarterly basis. 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 recovered. These loans continue to be reported as nonperforming loans unless they meet the requirements for
being reported as performing loans.

The following table presents the losses associated with the assets measured at fair value on a nonrecurring

basis during the years ended December 31, 2011, 2010 and 2009 (dollars in thousands):

One- to four-family
Home equity

Year Ended December 31,

2011

2010

2009 (1)

$221,717
112,426

$291,351
152,386

N/A
N/A

Total losses on loans receivable measured at fair value

$334,143

$443,737

$556,685

Losses on REO measured at fair value

$ 27,582

$ 41,203

$ 56,460

(1) Certain disclosures are not presented for periods prior to the adoption date as the amended fair value measurement disclosure guidance

for certain items was not adopted by the Company until January 1, 2010.

118

Disclosures about Fair Value of Financial Instruments

The fair value measurements accounting guidance also requires the disclosure of the fair value of financial
instruments not otherwise disclosed above. Different market assumptions and estimation methodologies could
significantly affect fair value amounts. The fair value of financial instruments, not otherwise disclosed above,
whose fair value approximates carrying value is summarized as follows:

• Cash and equivalents, cash and investments required to be segregated, margin receivables and

customer payables—Fair value is estimated to be carrying value.

•

Investment in FHLB stock—FHLB stock is carried at cost, which is considered to be a reasonable
estimate of fair value.

Financial instruments whose fair values were different from their carrying values are summarized below

(dollars in thousands):

Assets

Held-to-maturity securities
Loans receivable, net(1)

Liabilities

December 31, 2011

December 31, 2010

Carrying Value

Fair Value

Carrying Value

Fair Value

$ 6,079,512
$12,332,807

$ 6,282,989
$11,142,297

$ 2,462,710
$15,121,919

$ 2,422,335
$13,425,922

Deposits
Securities sold under agreements to repurchase
FHLB advances and other borrowings
Corporate debt

$26,459,985
$ 5,015,499
$ 2,736,935
$ 1,493,552

$26,473,902
$ 5,075,415
$ 2,671,877
$ 1,760,564

$25,240,297
$ 5,888,249
$ 2,731,714
$ 2,145,881

$25,259,496
$ 5,955,283
$ 2,658,311
$ 2,855,318

(1)

The carrying value of loans receivable, net includes the allowance for loan losses of $822.8 million and $1.0 billion as of December 31,
2011 and 2010, respectively.

Held-to-maturity securities—Fair value is determined using market and income approaches with quoted
market prices, recent market transactions and spread data for similar instruments for agency mortgage-backed
securities. The fair value of agency CMOs and other agency debt securities is determined using market and
income approaches 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.

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, pricing features
and remaining maturity. Assumptions for expected losses, prepayments and discount rates are adjusted to reflect
the individual characteristics of the loans, such as credit risk, coupon, term, and payment characteristics, as well
as the secondary market conditions for these types of loans. There was limited or no observable market data for
the home equity and one- to four-family loan portfolios, which indicates that the market for these types of loans
is considered to be inactive. Given the limited market data, 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 significantly 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 and
brokered certificates of deposit, fair value is estimated by discounting future cash flows at the rates currently
offered for deposits of similar remaining maturities.

119

Securities sold under agreements to repurchase—Fair value is determined by discounting future cash flows

at the rate implied for other similar instruments with similar remaining maturities.

FHLB advances and other borrowings—Fair value is estimated by discounting future cash flows at the rates
currently offered for borrowings of similar remaining maturities for FHLB advances. For subordinated
debentures, fair value is estimated by discounting future cash flows at the rate implied by dealer pricing quotes.
For margin collateral, overnight and other short-term borrowings and collateralized borrowings, fair value
approximates carrying value.

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. As
the price of the Company’s stock increases relative to the conversion price, the fair value of the convertible
debentures increases.

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 home equity lines of
credit in recent periods. As of December 31, 2011, the Company had $0.7 billion of unfunded commitments to
extend credit. Information related to such commitments and contingent liabilities is detailed in Note 21—
Commitments, Contingencies and Other Regulatory Matters.

120

NOTE 5—AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES

The amortized cost basis and fair value of available-for-sale and held-to-maturity securities are shown in the

following tables (dollars in thousands):

Amortized
Cost

Gross
Unrealized /
Unrecognized
Gains

Gross
Unrealized /
Unrecognized
Losses

Fair Value

December 31, 2011:

Available-for-sale securities:
Residential mortgage-backed securities:

Agency mortgage-backed securities and CMOs
Non-agency CMOs

$13,772,134
422,568

$203,541
3,331

(9,963) $13,965,712
341,553

(84,346)

Total residential mortgage-backed securities

14,194,702

206,872

(94,309)

14,307,265

Investment securities:
Agency debentures
Other agency debt securities
Municipal bonds
Corporate bonds

Total investment securities

743,246
541,038
42,325
25,357

1,351,966

—
13,654
261
—

13,915

(11,966)
(498)
(1,517)
(7,672)

(21,653)

731,280
554,194
41,069
17,685

1,344,228

Total available-for-sale securities

$15,546,668

$220,787

$(115,962) $15,651,493

Held-to-maturity securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and CMOs

$ 5,296,520

$162,975

(1,545) $ 5,457,950

Investment securities:
Agency debentures
Other agency debt securities

Total investment securities

163,412
619,580

782,992

5,764
36,283

42,047

—
—

—

169,176
655,863

825,039

Total held-to-maturity securities

$ 6,079,512

$205,022

(1,545) $ 6,282,989

December 31, 2010:

Available-for-sale securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and CMOs
Non-agency CMOs

$13,017,814
490,250

$ 71,274
2,885

$(190,974) $12,898,114
395,389

(97,746)

Total residential mortgage-backed securities

13,508,064

74,159

(288,720)

13,293,503

Investment securities:
Agency debentures
Other agency debt securities
Municipal bonds
Corporate bonds

Total investment securities

1,324,464
187,622
42,399
25,356

1,579,841

3,470
2,880
—
—

6,350

(58,382)
(3,040)
(5,068)
(7,527)

(74,017)

1,269,552
187,462
37,331
17,829

1,512,174

Total available-for-sale securities

$15,087,905

$ 80,509

$(362,737) $14,805,677

Held-to-maturity securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and CMOs

$ 1,928,651

4,747

$ (36,348) $ 1,897,050

Investment securities:
Agency debentures
Other agency debt securities

Total investment securities

219,197
314,862

534,059

—
—

—

(3,025)
(5,749)

(8,774)

216,172
309,113

525,285

Total held-to-maturity securities

$ 2,462,710

4,747

$ (45,122) $ 2,422,335

121

Contractual Maturities

The contractual maturities of all available-for-sale and held-to-maturity debt securities at December 31,

2011 are shown below (dollars in thousands):

Available-for-sale debt securities:
Due within one to five years
Due within five to ten years
Due after ten years

Total available-for-sale securities

Held-to-maturity securities:

Due within one to five years
Due within five to ten years
Due after ten years

Total held-to-maturity securities

Amortized Cost

Fair Value

22
1,595,306
13,951,340

25
1,629,257
14,022,211

$15,546,668

$15,651,493

225,678
1,645,737
4,208,097

233,132
1,742,097
4,307,760

$ 6,079,512

$ 6,282,989

The Company pledged $3.9 billion and $5.6 billion at December 31, 2011 and 2010, respectively, of
available-for-sale securities and $2.1 billion and $0.9 billion at December 31, 2011 and 2010, respectively, of
held-to-maturity securities as collateral for federal reserves, repurchase agreements and other purposes.

122

Other-Than-Temporary Impairment of Investments

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 (dollars in thousands):

Less than 12 Months

12 Months or More

Total

Unrealized /
Unrecognized
Losses

Fair Value

Unrealized /
Unrecognized
Losses

Fair Value

Unrealized /
Unrecognized
Losses

Fair Value

December 31, 2011:
Available-for-sale securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and

CMOs

Non-agency CMOs
Investment securities:
Agency debentures
Other agency debt securities
Municipal bonds
Corporate bonds

Total temporarily impaired

available-for-sale securities

$1,314,331
4,336

(4,014) $ 647,144
321,932

(355)

(5,949) $1,961,475
326,268

(83,991)

(9,963)
(84,346)

731,280
37,296
—
—

(11,966)
(498)
—
—

—
—
20,598
17,685

—
—
(1,517)
(7,672)

731,280
37,296
20,598
17,685

(11,966)
(498)
(1,517)
(7,672)

$2,087,243

$ (16,833) $1,007,359

$ (99,129) $3,094,602

$(115,962)

Held-to-maturity securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and

CMOs

Total temporarily impaired held-to-maturity

securities

December 31, 2010:
Available-for-sale securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and

$ 343,340

(1,192) $

42,445

(1,192) $

42,445

(353) $ 385,785

(1,545)

CMOs

Non-agency CMOs
Investment securities:
Agency debentures
Other agency debt securities
Municipal bonds
Corporate bonds

Total temporarily impaired

available-for-sale securities

$8,204,906

—

$(188,159) $ 165,478
377,309

—

(2,815) $8,370,384
377,309
(97,746)

$(190,974)
(97,746)

877,135
105,113
17,937
—

(58,382)
(3,040)
(2,193)
—

—
—
19,394
17,829

—
—
(2,875)
(7,527)

877,135
105,113
37,331
17,829

(58,382)
(3,040)
(5,068)
(7,527)

$9,205,091

$(251,774) $ 580,010

$(110,963) $9,785,101

$(362,737)

Held-to-maturity securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and

CMOs

Investment securities:
Agency debentures
Other agency debt securities

Total temporarily impaired held-to-maturity

$1,283,817

$ (36,348) $

— $

— $1,283,817

$ (36,348)

216,172
309,113

(3,025)
(5,749)

—
—

216,172
309,113

(3,025)
(5,749)

securities

$1,809,102

$ (45,122) $

— $

— $1,809,102

$ (45,122)

123

The Company does not believe that any individual unrealized loss in the available-for-sale or unrecognized
loss in the held-to-maturity portfolio as of December 31, 2011 represents a credit loss. The credit loss component
is the difference between the security’s amortized cost basis and the present value of its expected future cash
flows, and is recognized in earnings. The noncredit loss component is the difference between the present value of
its expected future cash flows and the fair value and is recognized through other comprehensive income (loss).
The Company assessed whether it intends to sell, or whether it is more likely than not that the Company will be
required to sell a security before recovery of its amortized cost basis. For debt securities that are considered
other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell
prior to recovery of its amortized cost basis, the Company determines the amount of the impairment that is
related to credit and the amount due to all other factors.

The majority of the unrealized or unrecognized losses on mortgage-backed securities are attributable to
changes in interest rates and a re-pricing of risk in the market. The majority of agency mortgage-backed
securities and CMOs, other agency debt securities and agency debentures are AAA-rated. Municipal bonds and
corporate bonds are evaluated by reviewing the credit-worthiness of the issuer and general market conditions.
The Company does not intend to sell the securities in an unrealized loss position 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 securities in an unrealized loss position at December 31, 2011.

The majority of the Company’s available-for-sale and held-to-maturity portfolio consists of residential
mortgage-backed securities. For residential mortgage-backed securities, the Company calculates the credit portion
of OTTI by comparing the present value of the expected future cash flows with the amortized cost basis of the
security. The expected future cash flows are determined using the remaining contractual cash flows adjusted for
future credit losses. The estimate of expected future credit losses includes the following assumptions: 1) expected
default rates based on current delinquency trends, foreclosure statistics of the underlying mortgages and loan
documentation type; 2) expected loss severity based on the underlying loan characteristics, including loan-to-value,
origination vintage and geography; and 3) expected loan prepayments and principal reduction based on current
experience and existing market conditions that may impact the future rate of prepayments. The expected cash flows
of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at
the present value amount. The following table presents a summary of the significant inputs considered for securities
that were other-than-temporarily impaired as of December 31, 2011:

Default rate(1)
Loss severity
Prepayment rate

December 31, 2011

Weighted
Average

Range

6 %
51 %
6 %

2 % - 21 %
40 % - 65 %
2 % - 15 %

(1) Represents the expected default rate for the next twelve months.

The following table presents a roll-forward of the credit loss component of the amortized cost of debt
securities that have noncredit loss recognized in other comprehensive income (loss) and credit loss recognized in
earnings for the periods presented (dollars in thousands):

Credit loss balance, beginning of period
Additions:
Initial credit impairment
Subsequent credit impairment

Year Ended December 31,

2011

2010

2009 (1)

$188,038

$150,372

$ 80,060

61
14,846

1,642
36,024

11,780
58,532

Credit loss balance, end of period

$202,945

$188,038

$150,372

(1)

The Company adopted the amended guidance for the recognition and presentation of OTTI for debt securities on April 1, 2009.

124

Within the securities portfolio, the highest concentration of credit risk is the non-agency CMO portfolio. As
of December 31, 2011, the Company held approximately $329.9 million in amortized cost of non-agency CMO
securities that had been other-than-temporarily impaired as a result of deterioration in the expected credit
performance of the underlying loans in the securities. The following table shows the components of net
impairment for the periods presented (dollars in thousands):

Other-than-temporary impairment (“OTTI”)
Less: noncredit portion of OTTI recognized into (out of) other

comprehensive income (loss) (before tax)

Net impairment

Year Ended December 31,

2011

2010

2009 (1)

$ (9,190)

$(41,510)

$(232,139)

(5,717)

3,840

143,044

$(14,907)

$(37,670)

$ (89,095)

(1)

The Company adopted the amended guidance for the recognition and presentation of OTTI for debt securities on April 1, 2009.

Gains on Loans and Securities, Net

The detailed components of the gains on loans and securities, net line item on the consolidated statement of

income (loss) are as follows (dollars in thousands):

Gains (losses) on loans, net
Gains on securities, net

Gains on available-for-sale securities and other investments
Losses on available-for-sale securities and other investments
Gains (losses) on trading securities, net
Hedge ineffectiveness

Gains on securities, net

Gains on loans and securities, net

NOTE 6—LOANS RECEIVABLE, NET

Loans receivable, net are summarized as follows (dollars in thousands):

Year Ended December 31,

2011

2010

2009

146

6,266

$ (12,496)

124,360
—
(1,883)
(2,390)

160,952
(187)
162
(981)

203,619
(30,441)
7,845
579

120,087

159,946

181,602

$120,233

$166,212

$169,106

One- to four-family
Home equity
Consumer and other

Total loans receivable
Unamortized premiums, net
Allowance for loan losses

Total loans receivable, net

December 31,

2011

2010

$ 6,615,808
5,328,657
1,113,257

$ 8,170,329
6,410,311
1,443,398

13,057,722
97,901
(822,816)

16,024,038
129,050
(1,031,169)

$12,332,807

$15,121,919

At December 31, 2011, we pledged $10.0 billion and $1.0 billion of loans as collateral to the FHLB and
Federal Reserve Bank, respectively. At December 31, 2010, we pledged $12.3 billion and $1.2 billion of loans as
collateral to the FHLB and Federal Reserve Bank, respectively.

125

The following table represents the breakdown of 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 (dollars in thousands):

Recorded Investment

Allowance for Loan
Losses

December 31,

2011

2010

2011

2010

Loans collectively evaluated for impairment
Loans individually evaluated for impairment (TDRs)

$11,736,731 $15,116,217 $502,673 $ 674,202
356,967

1,036,871 320,143

1,418,892

Total recorded investment in loans receivable

$13,155,623 $16,153,088 $822,816 $1,031,169

The weighted-average remaining maturity of mortgage loans secured by one- to four-family residences was
296 and 307 months at December 31, 2011 and 2010, respectively. Additionally, all loans outstanding at
December 31, 2011 and 2010 in the portfolio were serviced by other companies.

During the years ended December 31, 2011 and 2010, the Company agreed to settlements with three particular
originators specific to loans sold to the Company by those originators. One-time payments were made to the
Company satisfy in full all pending and future repurchase requests with those specific originators. During the years
ended December 31, 2011 and 2010, the Company applied $46 million and $25 million to the allowance for loan
losses, resulting in a corresponding reduction in net charge-offs as well as provision for loan losses.

In the second quarter of 2010, the Company sold a total of $232 million of its one- to four-family loans to
Fannie Mae, resulting in a gain of $6.5 million which is recorded in the gains on loans and securities, net line
item on the consolidated statement of income (loss). Of the $232 million in sales to Fannie Mae, $216 million
were in the form of an agency securitization. The Company received the agency mortgaged-backed securities
created from the securitization as proceeds from the sale and classified them as available-for-sale securities on
the consolidated balance sheet. The Company structured this transaction to minimize the risk associated with
credit losses of the underlying loans as Fannie Mae guarantees the payments from the resulting securities. The
Company did not consolidate the agency securitization as the Company concluded that it was not the primary
beneficiary under the variable interest entity model. For the foreseeable future, the Company does not plan to
securitize or sell any of the remaining one- to four-family loans in its held-for-investment portfolio.

Credit Quality

The Company tracks and reviews factors to predict and monitor credit risk in its mortgage loan portfolio on an
loan type, estimated current LTV/CLTV ratios, delinquency history,
ongoing basis. These factors include:
documentation type, borrowers’ current credit scores, housing prices, loan acquisition channel, loan vintage and
geographic location of the property. In economic conditions in which housing prices generally appreciate, the
Company believes that loan type, LTV/CLTV ratios, documentation type and credit scores are the key factors in
determining future loan performance. In a housing market with declining home prices and less credit available for
refinance, the Company believes the LTV/CLTV ratio becomes a more important factor in predicting and
monitoring credit risk. 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 and other loan portfolio on an ongoing basis.

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 14% of the home equity portfolio
was in the first lien position as of December 31, 2011. The Company holds both the first and second lien
positions in less than 1% of the home equity loan portfolio. The home equity loan portfolio consists of home
equity installment loans and home equity lines of credit.

126

equity line of credit portfolio had not converted from the interest-only draw period to an amortizing loan. In
addition, approximately 79% of the home equity line of credit portfolio will not begin amortizing until after
2014. The following table outlines when home equity lines of credit convert to amortizing for the home equity
line of credit portfolio as of December 31, 2011:

Period of Conversion to Amortizing Loan

Already amortizing
Year ending December 31, 2012
Year ending December 31, 2013
Year ending December 31, 2014
After December 31, 2014

% of Home Equity Line of Credit
Portfolio

7%
3%
4%
7%
79%

The following tables show the distribution of the Company’s mortgage loan portfolios by credit quality

indicator (dollars in thousands):

Current LTV/CLTV (1)

<=80%
80%-100%
100%-120%
>120%

Total mortgage loans receivable

Average estimated current LTV/CLTV (2)
Average LTV/CLTV at loan origination (3)

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$1,596,299
1,716,799
1,527,266
1,775,444
$6,615,808

$2,233,233
2,329,531
1,732,148
1,875,417
$8,170,329

$1,168,851
967,945
1,191,862
1,999,999
$5,328,657

$1,484,905
1,302,930
1,482,831
2,139,645
$6,410,311

106.7%
71.0%

100.8%
70.6%

112.1%
79.2%

107.7%
79.3%

(1) Current CLTV calculations for home equity loans are based on the maximum available line for home equity lines of credit and
outstanding principal balance for home equity installment loans. 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, it utilized
home price indices to estimate the current property value.
The average estimated current LTV ratio reflects the outstanding balance at the balance sheet date, divided by the estimated current value
of the underlying property.

(2)

(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 undrawn balances for home equity loans.

Documentation Type

Full documentation
Low/no documentation

Total mortgage loans receivable

Current FICO (1)

>=720
719 - 700
699 - 680
679 - 660
659 - 620
<620

Total mortgage loans receivable

One- to Four-Family
December 31,

Home Equity

December 31,

2011

2010

2011

2010

$2,845,571
3,770,237
$6,615,808

$3,556,480
4,613,849
$8,170,329

$2,699,164
2,629,493
$5,328,657

$3,201,381
3,208,930
$6,410,311

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$3,557,576
585,188
448,651
385,051
525,878
1,113,464
$6,615,808

$4,438,443
709,635
566,256
434,775
633,983
1,387,237
$8,170,329

$2,780,163
497,680
408,804
325,777
447,908
868,325
$5,328,657

$3,101,814
665,741
550,756
411,709
512,528
1,167,763
$6,410,311

(1)

127

Acquisition Channel

Purchased from a third party
Originated by the Company

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$5,420,858 $6,687,741 $4,669,551 $5,607,236
803,075
1,194,950

1,482,588

659,106

Total mortgage loans receivable

$6,615,808 $8,170,329 $5,328,657 $6,410,311

Vintage Year

2003 and prior
2004
2005
2006
2007
2008

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$ 239,868 $ 297,639 $ 302,606 $ 392,112
585,729
1,615,736
2,999,072
805,045
12,617

620,464
1,377,748
2,528,558
1,841,097
8,073

472,935
1,387,044
2,479,969
674,742
11,361

759,307
1,713,400
3,108,280
2,276,632
15,071

Total mortgage loans receivable

$6,615,808 $8,170,329 $5,328,657 $6,410,311

Geographic Location

California
New York
Florida
Virginia
Other states

One- to Four-Family

December 31,

Home Equity

December 31,

2011

2010

2011

2010

$3,096,028 $3,773,623 $1,690,319 $2,038,325
459,018
456,029
277,993
3,178,946

488,209
458,219
280,772
2,292,580

612,988
563,412
338,132
2,882,174

387,038
377,754
234,140
2,639,406

Total mortgage loans receivable

$6,615,808 $8,170,329 $5,328,657 $6,410,311

Delinquent Loans

The following table shows total loans receivable by delinquency category as of December 31, 2011 and

2010 (dollars in thousands):

December 31, 2011
One- to four-family
Home equity
Consumer and other

Current

30-89 Days
Delinquent

90-179 Days
Delinquent

180+ Days
Delinquent

Total

$ 5,726,745
5,016,568
1,091,010

$294,769
154,638
17,715

136,238
99,657
4,102

$458,056
57,794
430

$ 6,615,808
5,328,657
1,113,257

Total loans receivable

$11,834,323

$467,122

$239,997

$516,280

$13,057,722

December 31, 2010
One- to four-family
Home equity
Consumer and other

$ 6,770,513
6,040,021
1,412,707

$388,580
175,607
25,209

$226,052
142,997
4,802

$785,184
51,686
680

$ 8,170,329
6,410,311
1,443,398

Total loans receivable

$14,223,241

$589,396

$373,851

$837,550

$16,024,038

128

Nonperforming Loans

The Company classifies loans as nonperforming when they are no longer accruing interest, which includes
loans that are 90 days past due and TDRs that are on nonaccrual status for all classes of loans. If the Company’s
nonperforming loans at each year end had been performing in accordance with their terms, the Company would
have recorded interest income of approximately $92.5 million, $121.5 million and $108.7 million for the years
ended December 31, 2011, 2010 and 2009, respectively. During 2011, the Company recognized $15.3 million in
interest on loans that were in nonperforming status at December 31, 2011. At December 31, 2011 and 2010 there
were no commitments to lend additional funds to any of these borrowers.

Allowance for Loan Losses

The following table provides a roll-forward by loan portfolio of the allowance for loan losses for the years

ended December 31, 2011, 2010 and 2009 (dollars in thousands):

Allowance for loan losses, beginning of period
Provision for loan losses
Charge-offs
Recoveries

Charge-offs, net

Year Ended December 31, 2011

One- to
Four- Family

Home
Equity

Consumer
and Other

Total

$ 389,594
132,655
(228,857)
20,795

$ 576,089
286,396
(457,302)
58,105

$ 65,486
21,563
(59,290)
17,582

$ 1,031,169
440,614
(745,449)
96,482

(208,062)

(399,197)

(41,708)

(648,967)

Allowance for loan losses, end of period

$ 314,187

$ 463,288

$ 45,341

822,816

Allowance for loan losses, beginning of period
Provision for loan losses
Charge-offs
Recoveries

Charge-offs, net

Year Ended December 31, 2010

One- to
Four- Family

Home
Equity

Consumer
and Other

Total

$ 489,887
202,302
(302,595)

—

$ 620,067
529,461
(600,035)
26,596

$ 72,784
47,649
(80,359)
25,412

$ 1,182,738
779,412
(982,989)
52,008

(302,595)

(573,439)

(54,947)

(930,981)

Allowance for loan losses, end of period

$ 389,594

$ 576,089

$ 65,486

$ 1,031,169

Allowance for loan losses, beginning of period
Provision for loan losses
Charge-offs
Recoveries

Charge-offs, net

Year Ended December 31, 2009

One- to
Four- Family

Home
Equity

Consumer
and Other

Total

$ 185,163
669,043
(364,319)

—

$ 833,835
737,192
(966,259)
15,299

$ 61,613
91,877
(111,609)
30,903

$ 1,080,611
1,498,112
(1,442,187)
46,202

(364,319)

(950,960)

(80,706)

(1,395,985)

Allowance for loan losses, end of period

$ 489,887

$ 620,067

$ 72,784

$ 1,182,738

Impaired Loans—Troubled Debt Restructurings

The Company has a loan modification program that focuses on the mitigation of potential losses in the loan
portfolio. The Company considers modifications in which it made an economic concession to a borrower

129

experiencing financial difficulty a TDR. The various types of economic concessions that may be granted
typically consist of interest rate reductions, maturity date extensions, principal forgiveness or a combination of
these concessions. Upon being classified as a TDR, such loan is categorized as an impaired loan and impairment
is measured on an individual basis. Once a loan is modified as a TDR, the loan is considered impaired until
maturity regardless of whether the borrower performs under the modified terms.

Both one- to four-family and home equity TDRs, including trial modifications, are accounted for as
nonaccrual loans at the time of modification and return to accrual status after six consecutive payments are made
in accordance with the modified terms. The Company currently does not have an active TDR program for
consumer and other loans; therefore, there are no reported TDRs for consumer and other loans. TDRs are
classified as nonperforming until six consecutive payments have been made. At December 31, 2011 and 2010,
the unpaid principal balance in one- to four-family TDRs was $968.2 million and $546.4 million, respectively.
For home equity loans, the recorded investment in TDRs represents the unpaid principal balance.

The following table shows a summary of the Company’s recorded investment in TDRs that were on accrual
and non-accrual status, in addition to the recorded investment of TDRs as of December 31, 2011 and 2010
(dollars in thousands):

December 31, 2011

One- to four-family
Home equity

Accrual TDRs(1)

Current(2)

30-89 Days
Delinquent

90+ Days
Delinquent

Recorded
Investment in TDRs

Nonaccrual TDRs

$516,314
279,031

$250,989
72,578

$ 88,195
51,433

$117,455
42,897

$ 972,953
445,939

Total

$795,345

$323,567

$139,628

$160,352

$1,418,892

December 31, 2010

One- to four-family
Home equity

$229,605
279,315

$190,597
109,355

$ 55,447
56,742

$ 72,893
42,917

$ 548,542
488,329

Total

$508,920

$299,952

$112,189

$115,810

$1,036,871

(1) Represents TDRs that are current and have made six or more consecutive payments.
(2) Represents current TDRs that have not yet made six consecutive payments.

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 years ended December 31, 2011, 2010, and 2009 (dollars
in thousands):

One- to four-family
Home equity

Total

Average Recorded Investment

Interest Income Recognized

December 31,

2011

2010

2009

2011

2010

2009

$ 770,943
455,422

$399,306
460,892

$117,635
192,202

$27,034
9,981

$13,498
5,209

$5,487
1,309

$1,226,365

$860,198

$309,837

$37,015

$18,707

$6,796

130

Included in the allowance for loan losses was a specific allowance of $320.1 million, $357.0 million, and
$193.6 million that was established for TDRs at December 31, 2011, 2010, and 2009, respectively. The specific
allowance for these individually impaired loans represents the forecasted losses over the estimated remaining life
of the loan, including the economic concession to the borrower. The following table shows detailed information
related to the Company’s loans that were modified in a TDR as of December 31, 2011 and 2010 (dollars in
thousands):

December 31, 2011

December 31, 2010

Recorded
Investment in
TDRs

Specific
Valuation
Allowance

Net Investment
in TDRs

Recorded
Investment in
TDRs

Specific
Valuation
Allowance

Net Investment
in TDRs

$557,297
$424,834

$101,188
$218,955

$456,109
$205,879

$385,266
$479,745

$ 84,492
$272,475

$300,774
$207,270

With a recorded allowance:
One- to four-family
Home equity

Without a recorded
allowance: (1)

One- to four-family
Home equity

$415,656
$ 21,105

$ —
$ —

$415,656
$ 21,105

$163,276
8,584
$

$ —
$ —

$163,276
8,584
$

Total:

One- to four-family
Home equity

$972,953
$445,939

$101,188
$218,955

$871,765
$226,984

$548,542
$488,329

$ 84,492
$272,475

$464,050
$215,854

(1)

The TDRs without a recorded specific valuation allowance represents loans where the discounted cash flow analysis is equal to or
exceeds the recorded investment in the loan.

The vast majority of the Company’s 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
following modification categories: principal forgiven, principal deferred and re-age/extension/capitalization of
accrued interest. Each class is mutually exclusive in that if a TDR had an interest rate reduction with principal
forgiven and an extension, the TDR would only show up in the principal forgiven column in the table below. The
following tables provide the number of loans, post-modification balances immediately after being modified as a
TDR by major class of modification, and the financial impact of modifications for loans that were modified as a
TDR during the year ended December 31, 2011 (dollars in thousands):

Interest Rate Reduction

Number of
Loans

Principal
Forgiven

Principal
Deferred

Re-age/
Extension/
Interest
Capitalization

Other

Total

One- to four-family
Home equity

Total

1,177
1,452

2,629

$29,343
317

$78,582

—

$337,604
24,531

$ 25,354
98,873

$25,253
2,245

$496,136
125,966

$29,660

$78,582

$362,135

$124,227

$27,498

$622,102

One- to four-family
Home equity

Total

Financial Impact

Principal
Forgiven

Pre-TDR Weighted
Average Interest Rate

Post-TDR Weighted
Average Interest Rate

$9,308
646

$9,954

6.1 %
4.7 %

2.6 %
1.8 %

131

The Company considers TDRs that become 30 days past due to have experienced a payment default. The
following table shows the recorded investment of TDRs at December 31, 2011 that experienced a payment
default within 12 months after the modification for the year ended December 31, 2011 (dollars in thousands):

One- to four-family(1)
Home equity(2)

Total

Year Ended December 31, 2011

Number of
Loans

310
866

1176

Recorded
Investment

$126,172
65,331

$191,503

(1) As of December 31, 2011, $34.1 million of the recorded investment in one- to four-family loans that had a payment default in the trailing

12 months were classified as current.

(2) As of December 31, 2011, $17.2 million of the recorded investment in home equity loans that had a payment default in the trailing 12

months were classified as current.

The Company evaluates the re-delinquency rates in order to monitor TDR performance. More recent TDR
vintages have lower re-delinquency rates, which demonstrate the improving trend of TDR performance. The
Company also monitors the average re-delinquency rates for TDRs twelve months after the modification
occurred, which are based on cumulative performance since the modification program began:

December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
December 31, 2010

One- to
four-family

Home
equity

29 %
28 %
31 %
36 %
42 %

42 %
42 %
43 %
44 %
45 %

132

NOTE 7—ACCOUNTING FOR 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. Cash flow hedges, which include a combination of interest rate
swaps and purchased options, including caps and floors, are used primarily to reduce the variability of future
cash flows associated with existing variable-rate assets and liabilities and forecasted issuances of liabilities. Fair
value hedges, which include interest rate swaps, forward-starting swaps and swaptions, are used to offset
exposure to changes in value of certain fixed-rate assets and liabilities. The Company also recognizes certain
contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the
definition of a derivative. Each derivative is recorded on the consolidated balance sheet at fair value as a
freestanding asset or liability. The following table summarizes the fair value amounts of derivatives designated as
hedging instruments reported in the consolidated balance sheet (dollars in thousands):

Notional

Asset(1)

Liability(2)

Net(3)

Fair Value

December 31, 2011

Interest rate contracts:
Cash flow hedges:

Purchased options
Pay-fixed rate swaps

$2,625,000
2,165,000

$ 33,959

—

$
(281,071)

— $ 33,959
(281,071)

Total cash flow hedges

4,790,000

33,959

(281,071)

(247,112)

Fair value hedges:

Pay-fixed rate swaps
Receive-fixed rate swaps

Total fair value hedges

Total derivatives designated as hedging

instruments(4)

1,093,860
725,950

1,819,810

—
32,575

32,575

(77,132)
—

(77,132)
32,575

(77,132)

(44,557)

$6,609,810

$ 66,534

$(358,203) $(291,669)

December 31, 2010

Interest rate contracts:
Cash flow hedges:

Purchased options
Pay-fixed rate swaps
Purchased forward-starting swaps

$4,230,000
1,925,000
200,000

$123,561
15,314
—

— $ 123,561
(72,180)
(581)

(87,494)
(581)

Total cash flow hedges

6,355,000

138,875

(88,075)

50,800

Fair value hedges:

Pay-fixed rate swaps
Purchased swaptions
Receive-fixed rate swaps

1,156,561
1,495,000
725,950

63,404
46,632
—

(689)
—
(18,099)

62,715
46,632
(18,099)

Total fair value hedges

3,377,511

110,036

(18,788)

91,248

Total derivatives designated as hedging

instruments(4)

$9,732,511

$248,911

$(106,863) $ 142,048

(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 derivative assets net of derivative liabilities for disclosure purposes only.
(4) All derivatives were designated as hedging instruments as of December 31, 2011 and 2010.

133

Cash Flow Hedges

The effective portion of changes in fair value of the derivative instruments that hedge cash flows is reported
as a component of accumulated other comprehensive loss, net of tax in the consolidated balance sheet, for both
active and discontinued hedges. Amounts are included in net operating interest income as a yield adjustment in
the same period the hedged forecasted transaction affects earnings. The ineffective portion of changes in fair
value of the derivative instrument, which is equal to the excess of the cumulative change in the fair value of the
actual derivative over the cumulative change in the fair value of a hypothetical derivative which is created to
match the exact terms of the underlying instruments being hedged, is reported in the gains on loans and
securities, net line item in the consolidated statement of income (loss).

If it becomes probable that a hedged forecasted transaction will not occur, amounts included in accumulated
other comprehensive loss related to the specific hedging instruments would be immediately reclassified into the
gains on loans and securities, net line item in the consolidated statement of income (loss). If hedge accounting is
discontinued because a derivative instrument is sold, terminated or otherwise de-designated, amounts included in
accumulated other comprehensive loss related to the specific hedging instrument continue to be reported in
accumulated other comprehensive loss until the forecasted transaction affects earnings.

The future issuances of liabilities, including repurchase agreements, are largely dependent on the market
demand and liquidity in the wholesale borrowings market. As of December 31, 2011, the Company believes the
forecasted issuance of all debt in cash flow hedge relationships is probable. However, unexpected changes in
market conditions in future periods could impact the ability to issue this debt. The Company believes the
forecasted issuance of debt in the form of repurchase agreements is most susceptible to an unexpected change in
market conditions.

The following table summarizes the effect of interest rate contracts designated and qualifying as hedging
instruments in cash flow hedges on accumulated other comprehensive loss and on the consolidated statement of
income (loss) (dollars in thousands):

For the Year Ended December 31,

2011

2010

2009

Gains (losses) on derivatives recognized in OCI (effective portion), net of tax
Losses reclassified from AOCI into earnings (effective portion), net of tax
Cash flow hedge ineffectiveness gains (losses)(1)

$(216,302) $(77,724) $101,886
$ 37,055
$ 66,847
$ 47,774
579
$

(491) $

(265) $

(1)

The cash flow hedge ineffectiveness is reflected in the gains on loans and securities, net line item on the statement of consolidated
income (loss).

During the upcoming twelve months, the Company expects to include a pre-tax amount of approximately
$66.8 million of net unrealized losses that are currently reflected in accumulated other comprehensive loss in net
operating interest income as a yield adjustment in the same periods in which the related items affect earnings.
The maximum length of time over which transactions are hedged is 11 years.

The following table shows the balance in accumulated other comprehensive loss attributable to active and

discontinued cash flow hedges (dollars in thousands):

Accumulated other comprehensive loss balance (net of tax) related to:

Discontinued cash flow hedges
Active cash flow hedges

Total cash flow hedges

134

December 31,

2011

2010

$(279,091)
(178,862)

$(271,595)
(36,903)

$(457,953)

$(308,498)

The following table shows the balance in accumulated other comprehensive loss attributable to cash flow

hedges by type of hedged item (dollars in thousands):

Repurchase agreements
FHLB advances
Home equity lines of credit
Other

Total balance of cash flow hedges before tax

Tax benefit

Total balance of cash flow hedges, net of tax

December 31,

2011

2010

$(595,202)
(154,082)
15,772
(655)

$(424,509)
(111,170)
42,199
(628)

(734,167)
276,214

(494,108)
185,610

$(457,953)

$(308,498)

Fair Value Hedges

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 derivatives and the underlying assets or liabilities are recognized in the gains on loans and securities, 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 on loans and
securities, 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 on loans and securities, net line item in the consolidated statement of income (loss).

The following table summarizes the effect of interest rate contracts designated and qualifying as hedging
instruments in fair value hedges and related hedged items on the consolidated statement of income (loss) (dollars
in thousands):

Hedging
Instrument

2011

Hedged
Item

Year Ended December 31,

2010

Hedge
Ineffectiveness(1)

Hedging
Instrument

Hedged
Item

Hedge
Ineffectiveness(1)

$(144,968) $142,242

$(2,726)

$ 55,743

$(57,816)

$(2,073)

(51,557)
52,658
—

48,835
(49,109)
—

(2,722)
3,549
—

—
(18,099)
(1,714)

—
19,456
1,714

—
1,357
—

U.S. Treasury securities and

agency debentures
Agency mortgage-backed

securities
FHLB advances
Corporate debt

Total gains (losses)

included in earnings

$(143,867) $141,968

$(1,899)

$ 35,930

$(36,646)

$ (716)

(1) Reflected in the gains on loans and securities, net line item on the consolidated statement of income (loss).

135

Credit Risk

Impact on Fair Value Measurements

Credit risk is an element of the recurring fair value measurements for certain assets and liabilities, including
derivative instruments. Credit risk is managed by limiting activity to approved counterparties and setting
aggregate exposure limits for each approved counterparty. The Company also monitors collateral requirements
on derivative instruments through credit support agreements, which reduce risk by permitting the netting of
transactions with the same counterparty upon occurrence of certain events.

The Company considered the impact of credit risk on the fair value measurement for derivative instruments,
particularly those in net liability positions to counterparties, to be mitigated by the enforcement of credit support
agreements, and the collateral requirements therein. The Company pledged approximately $445.9 million of its
liability positions to
mortgage-backed securities as collateral
counterparties as of December 31, 2011.

related to its derivative contracts in net

The Company’s credit risk analysis for derivative instruments also considered whether the cost to mitigate
the credit loss exposure on derivative instruments in net asset positions would have resulted in material
adjustments to the valuations. During the year ended December 31, 2011, the consideration of counterparty credit
risk did not result in an adjustment to the valuation of the Company’s derivative instruments.

Impact on Liquidity

In the normal course of business, collateral requirements contained in the Company’s derivative instruments
are enforced by the Company and its counterparties. Upon enforcement of the collateral requirements, the
amount of collateral requested is typically based on the net fair value of all derivative instruments with the
counterparty; that is derivative assets net of derivative liabilities at the counterparty level. If the Company were
to be in violation of certain provisions of the derivative instruments, the counterparties to the derivative
instruments could request payment or collateralization on derivative instruments. The Company expects such
requests would be based on the fair value of derivative assets net of derivative liabilities at the counterparty level.
The fair value of derivative instruments in net liability positions at the counterparty level was $309.0 million as
of December 31, 2011. The fair value of the Company’s mortgage-backed and investment securities pledged as
collateral related to derivative contracts in net
liability positions to counterparties, $445.9 million as of
December 31, 2011, exceeded derivative instruments in net liability positions at the counterparty level by $136.9
million.

NOTE 8—PROPERTY AND EQUIPMENT, NET

Property and equipment, net consists of the following (dollars in thousands):

Software
Leasehold improvements
Equipment
Buildings
Furniture and fixtures
Land

December 31, 2011

December 31, 2010

Accumulated
Depreciation
and
Amortization

Net
Amount

Gross
Amount

Accumulated
Depreciation
and
Amortization

Net
Amount

$(296,529) $165,162
36,439
37,778
52,061
4,826
3,427

(65,694)
(54,252)
(19,866)
(18,708)
—

$500,747
98,308
155,978
71,927
24,753
3,427

$(337,864) $162,883
39,831
36,401
54,116
6,000
3,427

(58,477)
(119,577)
(17,811)
(18,753)
—

Gross
Amount

$461,691
102,133
92,030
71,927
23,534
3,427

Total

$754,742

$(455,049) $299,693

$855,140

$(552,482) $302,658

136

Depreciation and amortization expense related to property and equipment was $89.6 million, $87.9 million

and $83.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Software includes capitalized internally developed software costs. These costs were $54.8 million, $54.6
million and $59.2 million for the years ended December 31, 2011, 2010 and 2009, respectively. Completed
projects are carried at cost and are amortized on a straight-line basis over their estimated useful lives of four
years. Amortization for the capitalized amounts was $54.2 million, $48.3 million and $39.6 million for the years
ended December 31, 2011, 2010 and 2009, respectively. Also included in software at December 31, 2011 is
$48.1 million of internally developed software in the process of development for which amortization has not
begun.

NOTE 9—GOODWILL AND OTHER INTANGIBLES, NET

The following table discloses the changes in the carrying value of the Company’s goodwill, which is all

assigned to the trading and investing segment for the periods presented (dollars in thousands):

Balance at December 31, 2009
Purchase price legal settlement and other

Balance at December 31, 2010
Write off of goodwill related to exit activities

Balance at December 31, 2011

Trading & Investing
Goodwill

$1,952,326
(12,350)

1,939,976
(5,744)

$1,934,232

No goodwill was assigned to reporting units within the balance sheet management segment for the years
ended December 31, 2011 and 2010. As of December 31, 2011, there were no accumulated impairment losses
related to the trading and investment segment. The Company’s accumulated impairment losses related to its
goodwill, which all occurred in the balance sheet management segment, from January 1, 2002 through
December 31, 2011 were $101.2 million, which reduced the goodwill balance to zero during the year ended
December 31, 2007.

Other intangible assets with finite lives, which are primarily amortized on an accelerated basis, consist of

the following (dollars in thousands):

December 31, 2011

Weighted Average
Original
Useful Life
(Years)

Weighted Average
Remaining
Useful Life
(Years)

Gross Amount

Accumulated
Amortization Net Amount

Customer lists

$496,624

$(210,819)

$285,805

Customer lists
Other

Total other intangible assets

December 31, 2010

Weighted Average
Original Useful
Life (Years)

Weighted Average
Remaining Useful
Life (Years)

21
19

15
17

Gross Amount

Accumulated
Amortization Net Amount

$514,624
1,450

$(190,214)
(457)

$324,410
993

$516,074

$(190,671)

$325,403

137

Assuming no future impairments of these assets or additional acquisitions or dispositions, annual

amortization expense will be as follows (dollars in thousands):

Years ending December 31,

2012
2013
2014
2015
2016
Thereafter

Total future amortization expense

$ 25,183
24,269
23,244
21,764
21,109
170,236

$285,805

Amortization of other intangibles was $26.2 million, $28.5 million, and $29.7 million for the years ended

December 31, 2011, 2010, and 2009, respectively.

NOTE 10—OTHER ASSETS

Other assets consist of the following (dollars in thousands):

Deferred tax assets, net
Bank owned life insurance policy (1)
Deposits paid for securities borrowed
Accrued interest receivable
Prepaid FDIC insurance premiums
Real estate owned and repossessed assets
Brokerage operational related receivables
Derivative assets
Securities sold collateral not delivered
Third party loan servicing receivable
Other investments
Other prepaids
Loans held-for-sale
Other

December 31,

2011

2010

$1,578,704
287,129
266,045
151,932
90,658
87,615
69,524
66,534
65,815
40,964
40,317
33,359
11,713
170,364

$1,473,594
279,928
306,211
169,548
192,880
133,501
13,272
248,911
—
50,077
44,854
29,080
5,471
136,346

Total other assets

$2,960,673

$3,083,673

(1) Represents the cash surrender value.

NOTE 11—DEPOSITS

Deposits are summarized as follows (dollars in thousands):

Sweep deposits (1)
Complete savings deposits
Other money market and savings deposits
Checking deposits
Certificates of deposit
Brokered certificates of deposit

Total deposits

Amount

December 31,

Weighted-Average Rate

December 31,

2011

2010

2011

2010

$18,618,954
5,720,758
1,033,254
863,310
190,483
33,226

$16,139,585
6,683,631
1,092,949
825,561
407,091
91,480

0.08 % 0.08 %
0.15 % 0.30 %
0.15 % 0.24 %
0.10 % 0.10 %
2.59 % 2.62 %
5.42 % 4.52 %

$26,459,985

$25,240,297

0.12 % 0.20 %

(1) A sweep product transfers brokerage customer balances to banking subsidiaries, which hold these funds as customer deposits in FDIC

insured demand deposit and money market deposit accounts.

138

As of December 31, 2011 and 2010, the Company had $89.2 million and $67.7 million in non-interest
bearing deposits. The Company sold approximately $1 billion of savings accounts to Discover Financial Services
during the year ended December 31, 2010.

At December 31, 2011, scheduled maturities of certificates of deposit and brokered certificates of deposit

were as follows (dollars in thousands):

Years ending December 31,
2012
2013
2014
2015
2016
Thereafter

Subtotal
Unamortized discount, net

Total certificates of deposit and brokered certificates of deposit

$140,375
29,706
12,113
16,836
5,471
20,328

224,829
(1,120)

$223,709

Scheduled maturities of certificates of deposit with denominations greater than or equal to $100,000, and
greater than or equal to $250,000, which is the FDIC deposit insurance coverage limit, were as follows (dollars in
thousands):

>= $100,000

December 31,

>= $250,000

December 31,

2011

2010

2011

2010

Three months or less
Three through six months
Six through twelve months
Over twelve months

Total certificates of deposit

$ — $ — $ — $ —
1,991
2,540
2,419

19,309
30,007
28,584

4,490
22,683
9,702

—
2,105
1,450

$36,875

$77,900

$3,555

$6,950

139

NOTE 12—SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FHLB ADVANCES

AND OTHER BORROWINGS

Other borrowings, including maturities, at December 31, 2011 and other borrowings at December 31, 2010

are shown below (dollars in thousands):

FHLB Advances and
Other Borrowings

Repurchase
Agreements (1)

FHLB
Advances

Other

Total

Weighted
Average
Interest Rate

Years Ending December 31,

2012
2013
2014
2015
2016
Thereafter

$ 3,181,394
934,105
200,000
200,000
200,000
300,000

$ 820,000

—
320,000
483,600
250,000
400,000

Subtotal

Fair value hedge adjustments

5,015,499
—

2,273,600
29,095

5,318
1,280
32
—
—

427,610

434,240
—

$4,006,712
935,385
520,032
683,600
450,000
1,127,610

7,723,339
29,095

0.55 %
0.72 %
4.72 %
3.31 %
4.24 %
3.47 %

1.74 %

Total other borrowings at
December 31, 2011

Total other borrowings at
December 31, 2010

$5,015,499

$2,302,695

$434,240

$7,752,434

1.74 %

$5,888,249

$2,284,144

$447,570

$8,619,963

1.41 %

(1)

The maximum amount at any month end for repurchase agreements was $5.9 billion and $6.5 billion for the years ended December 31,
2011 and 2010.

Securities Sold Under Agreements to Repurchase

Repurchase agreements are collateralized by fixed- and variable-rate mortgage-backed securities or
investment grade securities. The brokers retain possession of the securities collateralizing the repurchase
agreements until maturity of the repurchase agreement. At December 31, 2011, there were no counterparties with
whom the Company’s amount of risk exceeded 10% of its shareholders’ equity.

Below is a summary of repurchase agreements and collateral associated with the repurchase agreements at

December 31, 2011 (dollars in thousands):

Contractual Maturity

Up to 30 days
30 to 90 days
Over 90 days

Total

Repurchase Agreements

Collateral

U.S. Government Sponsored
Enterprise Obligations

Weighted
Average
Interest Rate

Amount

Amortized Cost

Fair Value

0.65% $1,767,088
175,214
1.53%
3,073,197
1.08%

$1,848,074
187,212
3,283,282

$1,863,806
190,203
3,335,733

0.95% $5,015,499

$5,318,568

$5,389,742

FHLB Advances and Other Borrowings

FHLB Advances—The Company had $0.5 billion and $0.4 billion in floating-rate and $1.8 billion and $1.9
billion in fixed-rate FHLB advances at December 31, 2011 and 2010, respectively. The floating-rate advances
adjust quarterly based on the LIBOR. As a condition of its membership in the FHLB Atlanta, the Company is

140

required to maintain a FHLB stock investment currently equal to the lesser of: a percentage of 0.2% of total Bank
assets; or a dollar cap amount of $25 million. Additionally, the Bank must maintain an Activity Based Stock
investment which is currently equal to 4.5% of the Bank’s outstanding advances at the time of borrowing. On a
quarterly basis the FHLB Atlanta evaluates excess Activity Based Stock holdings for its members and makes a
determination regarding quarterly redemption of any excess Activity Based Stock positions. The Company had
an investment in FHLB stock of $140.2 million and $164.4 million at December 31, 2011 and 2010, respectively.
The Company must also maintain qualified collateral as a percent of its advances, which varies based on the
collateral type, and is further adjusted by the outcome of the most recent annual collateral audit and by FHLB’s
internal ranking of the Bank’s creditworthiness. These advances are secured by a pool of mortgage loans and
mortgage-backed securities. At December 31, 2011 and 2010, the Company pledged loans with a lendable value
of $5.0 billion and $5.6 billion, respectively, of the one- to four-family and home equity loans as collateral in
support of both its advances and unused borrowing lines.

During the year ended December 31, 2009, the Company paid down in advance of maturity $1.6 billion of
its FHLB advances. The Company recorded a loss on the early extinguishment of FHLB advances of $50.6
million for the year ended December 31, 2009. This loss is recorded in the gains (losses) on early extinguishment
of debt line item in the consolidated statement of income (loss). The Company did not have any similar
transactions for the years ended December 31, 2011 and 2010.

Other Borrowings—ETBH raised capital in the past through the formation of trusts, which sell trust
preferred securities 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 Floating Rate Cumulative Preferred Securities (“trust
preferred securities”), at par with a liquidation amount of $1,000 per capital security. The trusts used the
proceeds from the sale of issuances to purchase Floating Rate Junior Subordinated Debentures (“subordinated
debentures”) issued by ETBH, which guarantees the trust obligations and contributed proceeds from the sale of
its subordinated debentures to E*TRADE Bank in the form of a capital contribution. The most recent issuance of
trust preferred securities occurred in 2007.

The face values of outstanding trusts at December 31, 2011 are shown below (dollars in thousands):

Trusts

ETBH Capital Trust II
ETBH Capital Trust I
ETBH Capital Trust V, VI, VIII
ETBH Capital Trust VII, IX—XII
ETBH Capital Trust XIII—XVIII, XX
ETBH Capital Trust XIX, XXI, XXII
ETBH Capital Trust XXIII—XXIV
ETBH Capital Trust XXV—XXX

Total

Maturity
Date

Annual Interest Rate

2031
2031
2032
2033
2034
2035
2036
2037

10.25%
3.75% above 6-month LIBOR
3.25%-3.65% above 3-month LIBOR
3.00%-3.30% above 3-month LIBOR
2.45%-2.90% above 3-month LIBOR
2.20%-2.40% above 3-month LIBOR
2.10% above 3-month LIBOR
1.90%-2.00% above 3-month LIBOR

Face Value

5,000
20,000
51,000
65,000
77,000
60,000
45,000
110,000

$433,000

As of December 31, 2011 and 2010, other borrowings also included $2.3 million and $19.3 million,
respectively, of collateral pledged to the Bank by its derivatives counterparties to reduce credit exposure to
changes in market value. As of December 31, 2010, other borrowings also included $0.5 million of overnight and
other short-term borrowings in connection with the Federal Reserve Bank’s treasury, tax and loan programs. The
Company pledged $0.8 million of securities to secure these borrowings from the Federal Reserve Bank as of
December 31, 2010.

141

NOTE 13—CORPORATE DEBT

The Company’s corporate debt by type is shown below (dollars in thousands):

December 31, 2011
Interest-bearing notes:

7 7⁄ 8% Notes, due 2015
6 3⁄4% Notes, due 2016
12 1⁄ 2% Springing lien notes, due 2017
Total interest-bearing notes

Non-interest-bearing debt:

Face Value

Discount

Fair Value Hedge
Adjustment(1)

Net

$ 243,177
435,000
930,230

(1,172)
(7,419)
(162,903)

$ 7,394
—
6,233

$ 249,399
427,581
773,560

1,608,407

(171,494)

13,627

1,450,540

0% Convertible debentures, due 2019

43,012

—

43,012

Total corporate debt

$1,651,419

$(171,494)

$13,627

$1,493,552

December 31, 2010
Interest-bearing notes:

8% Notes, due 2011
7 3⁄ 8% Notes, due 2013
7 7⁄ 8% Notes, due 2015
12 1⁄ 2% Springing lien notes, due 2017
Total interest-bearing notes

Non-interest-bearing debt:

Face Value

Discount

Fair Value Hedge
Adjustment(1)

Net

3,644
414,665
243,177
930,230

—
(2,475)
(1,471)
(177,520)

$ —
15,117
9,273
7,283

3,644
427,307
250,979
759,993

1,591,716

(181,466)

31,673

1,441,923

0% Convertible debentures, due 2019

703,958

—

703,958

Total corporate debt

$2,295,674

$(181,466)

$31,673

$2,145,881

(1)

The fair value hedge adjustment is related to changes in fair value of the debt while in a fair value hedge relationship.

Debt Repayment and Redemption

In 2005 and 2004, the Company issued an aggregate principal amount of $100 million and $400 million in
8% senior notes due June 2011 (“2011 Notes”), respectively. In June 2011, the Company repaid the outstanding
balance of the 8% Notes.

In 2005, the Company issued an aggregate principal amount of $600 million in 7 3⁄ 8% senior notes due
September 2013 (“2013 Notes”). Interest was payable semi-annually and the notes were non-callable for four
years. In May 2011, the Company redeemed the outstanding balance of the 2013 Notes. The Company recorded a
$3.1 million gain on early extinguishment of debt related to the redemption of the 2013 Notes for the year ended
December 31, 2011.

Debt Exchange

In 2009, the Company exchanged $1.7 billion aggregate principal amount of its interest-bearing corporate
debt for an equal principal amount of newly-issued non-interest-bearing convertible debentures. The Company
recorded a pre-tax non-cash charge of $968.3 million on the early extinguishment of debt related to the Debt
Exchange for the year ended December 31, 2009.

142

7 7⁄ 8% Senior Notes due December 2015 (“2015 Notes”)

In 2005, the Company issued an aggregate principal amount of $300 million in 7 7⁄ 8% senior notes due
December 2015. Interest is payable semi-annually and the notes are non-callable for four years and may then be
called by the Company at a premium, which declines over time.

6 3⁄4% Senior Notes due May 2016 (“2016 Notes”)

In May 2011, the Company issued an aggregate principal amount of $435 million in 6 3⁄4% senior notes due
May 2016. Interest is payable semi-annually and the notes may be called by the Company at a premium, which
declines over time.

The Company used the proceeds from the sale of the 2016 Notes to redeem all of its outstanding 2013 Notes

including paying the associated redemption premium, accrued interest and related fees and expenses.

12 1⁄ 2% Springing Lien Notes due November 2017 (“2017 Notes”)

In 2007 and 2008, the Company issued an aggregate principal amount of $1.8 billion and $150 million of
2017 Notes, respectively. Interest is payable semi-annually and the notes are non-callable for five years and may
then be called by the Company at a premium, which declines over time. The Company had the option to make
interest payments on its 2017 Notes in the form of either cash or additional 2017 Notes through May 2010. In
2008, the Company elected to make its May interest payment of $121 million in cash and its November interest
payment of $121 million in the form of additional 2017 Notes. In 2009, the Company elected to make both the
May and November interest payments of $128.5 million and $54.7 million, respectively, in the form of additional
2017 Notes. In 2010, the Company made both the May and November interest payments in cash. In 2009, $1.3
billion of the 2017 Notes were exchanged for an equal principal amount of the newly-issued non-interest-bearing
convertible debentures. Refer to the Debt Exchange section above for more details.

0% Convertible Debentures due August 2019 (“2019 Notes”)

In 2009, the Company issued an aggregate principal amount of $1.7 billion in Class A convertible
debentures and $2.3 million in Class B convertible debentures (collectively “convertible debentures” or “2019
Notes”) of non-interest-bearing notes due August 31, 2019, in exchange for $1.3 billion principal of the 2017
Notes and $0.4 billion principal of the 2011 Notes.

The Class A convertible debentures are convertible into the Company’s common stock at a conversion rate
of $10.34 per $1,000 principal amount of Class A convertible debentures and the Class B convertible debentures
are convertible into the Company’s common stock at a conversion rate of $15.51 per $1,000 principal amount of
Class B convertible debentures. The holders of the convertible debentures may convert all or any portion of the
debentures at any time prior to the close of business on the second scheduled trading day immediately preceding
the maturity date. The indenture for the Company’s convertible debentures requires the Company to secure
equally and ratably the convertible debentures to the extent the 2017 Notes are secured.

In 2011, $660.9 million of the Company’s convertible debentures were converted into 63.9 million shares of
common stock. As of December 31, 2011, a cumulative total of $1.7 billion of the Class A convertible
debentures and $2.2 million of the Class B convertible debentures had been converted into 164.1 million shares
and 0.1 million shares, respectively, of the Company’s common stock.

Ranking, Security and Subsidiary Guarantees

All of the Company’s notes rank equal in right of payment with all of the Company’s existing and future
unsubordinated indebtedness and rank senior in right of payment to all its existing and future subordinated
indebtedness.

143

In June 2011, the Company granted a security interest to the holders of the 2017 Notes and the 2019 Notes
pursuant to the terms of the applicable indentures. Under the applicable indentures, the security interest is limited
to $300 million of property and assets owned by certain unregulated subsidiaries. The security interest granted
was secured by collateral significantly less in value than $300 million. Also in June 2011, certain of the
Company’s subsidiaries issued guarantees on each outstanding series of senior notes and 2019 Notes. E*TRADE
Bank and E*TRADE Securities LLC, among others, did not issue such guarantees.

Corporate Debt Covenants

Certain of the Company’s corporate debt described above have terms which include financial maintenance

covenants. As of December 31, 2011, the Company was in compliance with all such maintenance covenants.

Future Maturities of Corporate Debt

Scheduled principal payments of corporate debt as of December 31, 2011 are as follows (dollars in

thousands):

Years ending December 31,

2012
2013
2014
2015
2016
Thereafter

Total future principal payments of corporate debt

Unamortized discount and fair value adjustment, net

Total corporate debt

NOTE 14—OTHER LIABILITIES

Other liabilities consist of the following (dollars in thousands):

Deposits received for securities loaned
Derivative liabilities
Income tax-related liabilities
Accounts payable and accrued expenses
Other payables to brokers, dealers and clearing organizations
Securities purchased collateral not received
Subserviced loan advances
Other

Total other liabilities

—
—
—
243,177
435,000
973,242

1,651,419
(157,867)

$1,493,552

December 31,

2011

2010

$ 505,548
358,203
347,579
218,223
135,094
65,815
33,618
51,593

$ 570,691
106,863
171,411
144,390
157,031
—
114,232
29,711

$1,715,673

$1,294,329

144

NOTE 15—INCOME TAXES

The components of income tax expense (benefit) are as follows (dollars in thousands):

Current:

Federal
State
Foreign
Tax expense recognized for uncertainties

Total current

Deferred:

Federal
State
Foreign

Total deferred

Income tax expense (benefit)

Year Ended December 31,

2011

2010

2009

$ (2,645)
15,651
523
7,205

$ (17,393)
6,092
448
122,383

$ (58,042)
6,049
24
2,989

20,734

111,530

(48,980)

8,136
(241)
—

7,895

(24,589)
(61,578)
(32)

(448,903)
(39,993)
207

(86,199)

(488,689)

$28,629

$ 25,331

$(537,669)

The components of income (loss) before income tax expense (benefit) are as follows (dollars in thousands):

Domestic
Foreign

Year Ended December 31,

2011

2010

2009

$181,959
3,371

$ 7,426
(10,567)

$(1,771,693)
(63,738)

Income (loss) before income tax expense (benefit)

$185,330

$ (3,141)

$(1,835,431)

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 31, 2011,

2010 and 2009 are as follows (dollars in thousands):

Unrecognized tax benefits, beginning of period

Additions based on tax positions related to prior years
Additions based on tax positions related to current year
Reductions based on tax positions related to prior years
Reductions based on tax positions related to current year
Settlements with taxing authorities
Statute of limitations lapses

Unrecognized tax benefits, end of period

Year Ended December 31,

2011

2010

2009

$281,666
4,174
152,497
(59,315)
—
(422)
(1,195)

$ 58,696
165,834
62,752
(1,517)
—
(3,448)
(651)

$64,655
2,783
2,293
(1,229)
(8,159)
(681)
(966)

$377,405

$281,666

$58,696

The unrecognized tax benefit increased $95.7 million to $377.4 million during the year ended December 31,
2011. The majority of additional unrecognized tax benefit recorded during 2011 related to Section 382
limitations on federal and state net operating losses. At December 31, 2011, $137.0 million (net of federal
benefits on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably
impact the effective income tax rate in future periods.

145

The following table summarizes the tax years that are either currently under examination or remain open
under the statute of limitations and subject to examination by the major tax jurisdictions in which the Company
operates:

Jurisdiction

Hong Kong
United Kingdom
United States
Various states(1)

Open Tax Years

2001-2011
2008-2011
2004-2011
2002-2011

(1)

Includes California, Georgia, Illinois, New Jersey, New York and Virginia.

It is likely that certain examinations may be settled or the statute of limitations could expire with regards to
other tax filings, in the next twelve months. In addition, proposed legislation could favorably impact certain of
the Company’s unrecognized tax benefits. Such events would generally reduce the Company’s unrecognized tax
benefits, either because the tax positions are sustained or because the Company agrees to the disallowance, by as
much as $10.2 million, all of which could impact the Company’s total tax provision or the effective tax rate.

The Company’s practice is to recognize interest and penalties, if any, related to income tax matters in
income tax expense. The Company has total reserves for interest and penalties of $11.6 million and $9.9 million
as of December 31, 2011 and 2010, respectively. The tax expense for the year ended December 31, 2011 includes
an increase in the accrual for interest and penalties of $1.7 million, principally related to state taxes.

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. Prior year balances for the deferred tax assets and liabilities have
been re-presented to ensure consistency between periods. The adjustments relate to the presentation of the basis
differences in investments and mark to market for certain loans and securities. The temporary differences and tax
carry forwards that created deferred tax assets and deferred tax liabilities are as follows (dollars in thousands):

Deferred tax assets:

Reserves and allowances, net
Net operating losses
Basis differences in investments
Capitalized interest
Deferred compensation
Tax credits
Restructuring reserve and related write-downs
Other

Total deferred tax assets

Valuation allowance

Total deferred tax assets, net of valuation

allowance

Deferred tax liabilities:

Depreciation and amortization
Mark to market

Total deferred tax liabilities

December 31,

2011

2010

$1,216,487
567,774
67,738
65,767
44,512
16,169
15,092
27,109

$1,180,768
588,178
13,830
59,075
45,472
6,383
15,523
12,762

2,020,648
(73,533)

1,921,991
(75,959)

1,947,115

1,846,032

(260,600)
(107,811)

(184,616)
(187,822)

(368,411)

(372,438)

Net deferred tax asset

$1,578,704

$1,473,594

146

The Company is required to establish a valuation allowance for deferred tax assets and record a charge to
income if it is determined, based on available evidence at the time the determination is made, that it is more
likely than not that some portion or all of the deferred tax assets will not be realized. If the Company did
conclude that a valuation allowance was required, the resulting loss could have a material adverse effect on its
financial condition and results of operations. The analysis of the need for a valuation allowance recognizes that
the Company is in a cumulative book loss position as of the three-year period ended December 31, 2011, which
is considered significant and objective evidence that it may not be able to realize some portion of the deferred tax
assets in the future. However, the Company did not establish a valuation allowance against its federal deferred
tax assets as of December 31, 2011 as it believes that it is more likely than not that all of these assets will be
realized. Approximately two-thirds of existing federal deferred tax assets are not related to net operating losses
and therefore, have no expiration date. The Company ended 2011 with $781 million of gross federal net
operating losses which will expire within the next 16 years.

The Company’s evaluation focused on identifying significant, objective evidence that it will be able to
realize its deferred tax assets in the future. The Company determined that its expectations regarding future
earnings are objectively verifiable due to various factors. One factor is the consistent profitability of the
Company’s core business, the trading and investing segment, which has generated substantial income for each of
the last eight years, including through uncertain economic and regulatory environments. The core business is
driven by brokerage customer activity and includes trading, brokerage cash, margin lending, long-term investing
and other brokerage related activities. These activities drive variable expenses that correlate to the volume of
customer activity, which has resulted in stable, ongoing profitability in this business.

Another factor is the mitigation of losses in the balance sheet management segment, which generated a large
net operating loss in 2007 caused by the crisis in the residential real estate and credit markets. Much of this loss
came from the sale of the asset-backed securities portfolio and credit losses from the mortgage loan portfolio.
The Company no longer holds any of those asset-backed securities and shut down mortgage loan acquisition
activities in 2007. In effect, the key business activities that led to the generation of the deferred tax assets were
shut down over four years ago. As a result, the losses in the balance sheet management segment have continued
to decline significantly. In addition, the Company continues to realize the benefit of various credit loss mitigation
activities for the mortgage loans purchased in 2007 and prior, most notably, actively reducing or closing unused
home equity lines of credit and aggressively exercising put-back clauses to sell back improperly documented
loans to the originators. As a result of these loss containment measures, provision for loan losses has declined for
three consecutive years, down 72% from its peak of $1.6 billion for the year ended December 31, 2008.

For certain of the Company’s state, foreign country and charitable contribution deferred tax assets, the
Company maintained a valuation allowance of $73.5 million and $76.0 million at December 31, 2011 and 2010,
respectively, as it is more likely than not that they will not be fully realized.

The principal components of the deferred tax assets for which a valuation allowance has been established
include the following state and foreign country net operating loss carry forwards and charitable contributions
which have a limited carry forward period:

• At December 31, 2011, the Company had certain gross foreign country net operating loss carry forwards and
other foreign country temporary differences of approximately $142.2 million for which a deferred tax asset
of approximately $35.6 million was established. The foreign net operating losses represent the foreign tax
loss carry forwards in numerous foreign countries, the vast majority of which are not subject to expiration. In
most of these foreign countries, the Company has historical tax losses; accordingly, the Company has
provided a valuation allowance of $35.6 million against such deferred tax assets at December 31, 2011.

• At December 31, 2011, the Company had gross state net operating loss carry forwards that expire by
2030 in several states of $2.3 billion, most of which are subject to reduction for apportionment when
utilized. A deferred tax asset of approximately $102.1 million has been established related to these
state net operating loss carry forwards and temporary differences with a valuation allowance of $28.7
million against such deferred tax assets at December 31, 2011.

147

• At December 31, 2011, the Company had charitable contribution carry forwards of $24.2 million that
expire by 2015. A deferred tax asset of approximately $9.2 million was established with a
corresponding $9.2 million valuation allowance as it is more likely than not that these contributions
will expire unused.

The Company intends to permanently reinvest $16.8 million of undistributed earnings and profits in certain
foreign subsidiaries. As a result, the Company has not recorded $6.8 million of deferred income taxes on those
earnings at December 31, 2011.

Effective Tax Rate

The effective tax rate differed from the federal statutory rate as follows:

Federal statutory rate
State income taxes, net of federal tax benefit
Difference between statutory rate and foreign effective tax rate
Tax exempt income
Disallowed interest expense
Disallowed Debt Exchange loss
Liquidation of a foreign subsidiary
Change in valuation allowance
Other

Effective tax rate

Debt Exchange

Year Ended December 31,

2011

2010

2009

35.0% (35.0)% (35.0)%
81.0
9.1
47.3
0.3
(19.9)
(0.3)
387.3
6.7
—
—
(33.3) —
236.5
(1.8)
109.1
(0.3)

(2.6)
0.1
(0.1)
4.1
4.7
—
(0.7)
0.2

15.4% 806.3% (29.3)%

For the year ended December 31, 2009, the effective tax rate on the Debt Exchange of 20% was below the
Company’s statutory federal tax rate of 35%. This was primarily due to certain components of the loss on the
Debt Exchange not being deductible for tax purposes, which are summarized in the following table (dollars in
thousands):

Deductible portion of the loss on the Debt Exchange
Non-deductible portion of the loss on the Debt Exchange
Prior period interest expense on the 2017 Notes not deductible as a result

of the Debt Exchange

Total

Tax Ownership Change

Year Ended December 31, 2009

Amount of Loss Tax Rate Tax Benefit

$722,952
245,302

35% $253,033
—
—

N/A

(57,687)

$968,254

20 % $195,346

During the third quarter of 2009, the Company exchanged $1.7 billion principal amount of interest-bearing
debt for an equal principal amount of non-interest-bearing convertible debentures. Subsequent to the Debt
Exchange, $592.3 million and $128.7 million debentures were converted into 57.2 million and 12.5 million
shares of common stock during the third and fourth quarters of 2009, respectively. As a result of these
conversions, the Company believes it experienced a tax ownership change during the third quarter of 2009.

As of the date of the ownership change, the Company had federal NOLs available to carry forward of
approximately $1.4 billion. Section 382 imposes restrictions on the use of a corporation’s NOLs, certain

148

recognized built-in losses and other carryovers after an “ownership change” occurs. Section 382 rules governing
when a change in ownership occurs are complex and subject to interpretation; however, an ownership change
generally occurs when there has been a cumulative change in the stock ownership of a corporation by certain
“5% shareholders” of more than 50 percentage points over a rolling three-year period.

The Company believes the tax ownership change will extend the period of time it will take to fully utilize its
pre-ownership change NOLs, but will not limit the total amount of pre-ownership change NOLs it can utilize.
The Company’s updated estimate is that it will be subject to an overall annual limitation on the use of its
pre-ownership change NOLs of approximately $194 million. The Company’s overall pre-ownership change
NOLs, which were approximately $1.4 billion, have a statutory carry forward period of 20 years (the majority of
which expire in 16 years). As a result, the Company believes it will be able to fully utilize these NOLs in future
periods.

The Company’s ability to utilize the pre-ownership change NOLs is dependent on its ability to generate
sufficient taxable income over the duration of the carry forward periods and will not be impacted by its ability or
inability to generate taxable income in an individual year.

NOTE 16—SHAREHOLDERS’ EQUITY

The activity in shareholders’ equity during the year ended December 31, 2011 is summarized as follows

(dollars in thousands):

Common Stock /
Additional Paid-In
Capital

Accumulated Deficit /
Other Comprehensive
Loss

Total

Beginning balance, December 31, 2010

Net income
Conversions of convertible debentures
Net change from available-for-sale securities
Net change from cash flow hedging instruments
Other(1)

$6,642,923

—

660,946

—
—
5,847

$ (2,590,478)
156,701
—
199,643
(149,455)
1,823

$4,052,445
156,701
660,946
199,643
(149,455)
7,670

Ending balance, December 31, 2011

$7,309,716

$(2,381,766)

$4,927,950

(1) Other includes employee share-based compensation accounting and changes in accumulated other comprehensive loss from foreign

currency translation.

Conversions of Convertible Debentures

During the years ended December 31, 2011 and 2010, $660.9 million and $317.0 million of the Company’s
convertible debentures were converted into 63.9 million and 30.7 million shares of common stock, respectively.
For further details on the convertible debentures, see Note 13—Corporate Debt.

149

Claims Settlement

In January 2010, a security holder paid the Company $35 million to settle a claim under Section 16(b) of the
Securities Exchange Act of 1934. Section 16(b) requires certain persons and entities whose securities trading
activities result in “short swing” profits to repay such profits to the issuer of the security. Section 16(b) liability
does not require that the security holder trade while in possession of material non-public information.

Reverse Stock Split

In the second quarter of 2010, after approval by the Company’s shareholders at the Company’s 2010 Annual
Meeting, a 1-for-10 reverse stock split of the Company’s common stock became effective. All prior periods were
adjusted to reflect the impact of the reverse stock split.

Preferred Stock

The Company has 1.0 million shares authorized in preferred stock. None were issued and outstanding at
December 31, 2011 and 2010. On March 30, 2010, the Company amended its Certificate of Incorporation to
eliminate the designation of the Series A Preferred Stock and Series B Participating Cumulative Preferred Stock.

Common Stock Offerings

In September 2009, the Company initiated and completed an At the Market Program to offer and sell up to
$150 million of common stock, in which the Company issued 8.0 million shares of common stock resulting in net
proceeds of $147 million.

In June 2009, the Company issued 50.0 million shares of common stock, par value $0.01 in a Public Equity
Offering. The Public Equity Offering resulted in net proceeds, after commissions, of $523 million. Citadel, one
of the Company’s largest stockholders, purchased approximately 9.1 million shares of the Company’s common
stock in the Public Equity Offering.

In May 2009, the Company initiated an Equity Drawdown Program to offer and sell up to $150 million of
common stock from time to time, in which the Company issued 4.1 million shares of common stock resulting in
net proceeds of $63 million. The Equity Drawdown Program was suspended in June 2009.

Debt Exchange Impact on Shareholders’ Equity

The completion of the Debt Exchange in 2009 resulted in a pre-tax non-cash charge of $968.3 million and
an increase of $707.2 million to additional paid-in capital. The net effect of the exchange to shareholders’ equity
was a reduction of $65.7 million. The increase of $707.2 million in additional paid-in capital was attributable to
the amortization of the entire premium on the newly-issued convertible debentures, which was immediately
amortized to additional paid-in capital since amortizing the premium into interest expense over the life of the
non-interest-bearing convertible debentures would have resulted in recording interest income on a liability (a
negative yield).

Cumulative Effect of the Adoption of Accounting Guidance

On April 1, 2009, the Company adopted the amended guidance for the recognition of OTTI for debt
securities. As a result of the adoption, the Company recognized a $20.2 million after-tax decrease to beginning
accumulated deficit and a corresponding offset in accumulated other comprehensive loss on the consolidated
balance sheet. This adjustment represents the after-tax difference between the impairment reported in prior
periods for securities on the consolidated balance sheet as of April 1, 2009 and the level of impairment that
would have been recorded on these same securities under the new accounting guidance.

150

NOTE 17—EARNINGS (LOSS) PER SHARE

The following table is a reconciliation of basic and diluted earnings (loss) per share (in thousands, except

per share amounts):

Basic:

Numerator:

Net income (loss)

Denominator:

Year Ended December 31,

2011

2010

2009

$156,701

$ (28,472) $(1,297,762)

Basic weighted-average shares outstanding

267,291

211,302

109,544

Diluted:

Numerator:

Net income (loss)

Denominator:

Basic weighted-average shares outstanding
Effect of dilutive securities:

$156,701

$ (28,472) $(1,297,762)

267,291

211,302

109,544

Weighted-average convertible debentures
Weighted-average options and restricted stock issued to

employees

21,924

607

—

Diluted weighted-average shares outstanding

289,822

211,302

109,544

Per share:

Basic earnings (loss) per share

Diluted earnings (loss) per share

0.59

0.54

(0.13) $

(11.85)

(0.13) $

(11.85)

The Company excluded the following shares from the calculations of diluted earnings (loss) per share as the

effect would have been anti-dilutive (shares in millions):

Weighted-average shares excluded as a result of the Company’s net loss:

Convertible debentures
Stock options and restricted stock awards and units
Other stock options and restricted stock awards and units

Total

Year Ended
December 31,

2011

2010

2009

N/A 77.2
0.8
N/A
2.8
3.7

3.7

80.8

38.9
0.6
2.7

42.2

NOTE 18—EMPLOYEE SHARE-BASED PAYMENTS AND OTHER BENEFITS

In 2005, the Company adopted and the shareholders approved the 2005 Stock Incentive Plan (“2005 Plan”)
to replace the 1996 Stock Incentive Plan (“1996 Plan”) which provides for the grant of nonqualified or incentive
stock options and awards to officers, directors, key employees and consultants for the purchase of newly issued
shares of the Company’s common stock at a price determined by the Board at the date the option is granted. The
Company does not have a specific policy for issuing shares upon stock option exercises and share unit
conversions; however, new shares are typically issued in connection with exercises and conversions. The
Company intends to continue to issue new shares for future exercises and conversions.

151

Under the 2005 Plan, the remaining unissued authorized shares of the 1996 Plan, up to 4.2 million shares,
were authorized for issuance. Additionally, any shares that had been awarded but remained unissued under the
1996 Plan that were subsequently canceled, would be authorized for issuance under the 2005 Plan, up to
3.9 million shares. In May 2009 and 2010, an additional 3.0 million and 12.5 million shares, respectively, were
authorized for issuance under the 2005 Plan at the Company’s shareholders’ annual meetings in each of those
respective years. As of December 31, 2011, 13.0 million shares were available for grant under the 2005 Plan.

Employee Stock Option Plans

Options are generally exercisable ratably over a two- to four-year period from the date the option is granted
and most options expire within seven years from the date of grant. Certain options provide for accelerated vesting
upon a change in control. Exercise prices are generally equal to the fair value of the shares on the grant date.

The Company recognized $2.4 million, $8.4 million and $19.5 million in compensation expense for stock
options for the years ended December 31, 2011, 2010 and 2009, respectively. The Company recognized a tax
benefit of $1.1 million, $3.2 million and $7.2 million related to the stock options for the years ended
December 31, 2011, 2010 and 2009, respectively.

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option
pricing model based on the assumptions noted in the table below. Expected volatility is based on a combination
of historical volatility of the Company’s stock and implied volatility of publicly traded options on the Company’s
stock. The expected term represents the period of time that options granted are expected to be outstanding. The
expected term is estimated using employees’ actual historical behavior and projected future behavior based on
expected exercise patterns. The risk-free interest rate is based on the U.S. Treasury zero-coupon bond where the
remaining term approximates the expected term. The dividend yield is zero as the Company has not, nor does it
currently plan to, issue dividends to its shareholders.

Year Ended December 31,

2011

2010

2009

Expected volatility
Expected term (years)
Risk-free interest rate
Dividend yield

61% 78% 90%
4.2

4.3

4.2

—

The weighted-average fair values of options granted were $8.50, $8.81 and $6.24 for the years ended
December 31, 2011, 2010 and 2009, respectively. Intrinsic value of options exercised were $0.7 million and $0.3
million for the years ended December 31, 2011 and 2010, respectively. No stock options were exercised for the
year ended December 31, 2009.

A summary of options activity under the stock option plan is presented below:

Outstanding at December 31, 2010

Granted
Exercised
Canceled/forfeited

Outstanding at December 31, 2011

Vested and expected to vest at December 31, 2011

Exercisable at December 31, 2011

152

Shares (in
thousands)

Weighted-
Average
Exercise Price

2,989
541
(41)
(776)

2,713

2,613

1,905

$75.62
$17.52
$10.42
$62.32

$68.83

$70.80

$90.77

Weighted-
Average
Remaining
Contractual
Life

Aggregate
Intrinsic Value
(in thousands)

3.57

$3,483

3.68

3.57

2.80

$ —

As of December 31, 2011, there was $4.0 million of total unrecognized compensation cost related to

non-vested stock options. This cost is expected to be recognized over a weighted-average period of 2.4 years.

Restricted Stock Awards and Restricted Stock Units

The Company issues restricted stock awards and restricted stock units to its employees. Each restricted
stock unit can be converted into one share of the Company’s common stock upon vesting. These awards are
issued at the fair value on the date of grant and vest ratably over the period, generally two to four years. The fair
value is calculated as the market price upon issuance.

The Company recorded $11.7 million, $17.0 million and $26.7 million for the years ended December 31,
2011, 2010 and 2009, respectively, in compensation expense related to restricted stock awards and restricted
stock units. The Company recognized a tax benefit of $3.4 million, $5.9 million and $9.6 million related to
restricted stock awards and restricted stock units for the years ended December 31, 2011, 2010 and 2009,
respectively.

A summary of non-vested restricted stock award activity is presented below:

Non-vested at December 31, 2010

Issued
Released (vested)
Canceled/forfeited

Non-vested at December 31, 2011

A summary of non-vested restricted stock unit activity is presented below:

Shares (in
thousands)

Weighted-
Average Grant
Date Fair Value

145
25
(107)
—

$20.75
$16.20
$22.58
$ —

$15.89

Outstanding at December 31, 2010

Issued
Released
Canceled/forfeited

Outstanding at December 31, 2011

Expected to vest at December 31, 2011

Weighted-
Average
Remaining
Contractual
Life

Aggregate
Intrinsic Value
(in thousands)

0.85

$22,181

1.50

1.47

$15,677

$13,894

Units (in
thousands)

1,393
1,594
(939)
(80)

1,968

1,744

As of December 31, 2011, there was $19.6 million of total unrecognized compensation cost related to
non-vested awards. This cost is expected to be recognized over a weighted-average period of 2.6 years. The total
fair value of restricted shares and restricted stock units vested was $15.4 million, $20.9 million and $8.1 million
for the years ended December 31, 2011, 2010 and 2009, respectively.

401(k) Plan

The Company has a 401(k) salary deferral program for eligible employees who have met certain service
requirements. The Company matches certain employee contributions; additional contributions to this plan are at
the discretion of the Company. Total contribution expense under this plan was $4.5 million, $4.1 million and
$4.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.

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NOTE 19—REGULATORY REQUIREMENTS

Registered Broker-Dealers

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 international broker-dealer
subsidiaries, located in Europe and Asia, are subject to capital requirements determined by their respective
regulators.

As of December 31, 2011, all of the Company’s broker-dealer subsidiaries met minimum net capital
requirements. Total required net capital was $0.1 billion at December 31, 2011. In addition, the Company’s
broker-dealer subsidiaries had excess net capital of $0.7 billion at December 31, 2011.

The table below summarizes the minimum excess capital requirements for the Company’s broker-dealer

subsidiaries (dollars in thousands):

E*TRADE Clearing LLC(1)
E*TRADE Securities LLC(1)
E*TRADE Capital Markets, LLC(2)
International broker-dealers

Total

(1)

(2)

Elected to use the Alternative method to compute net capital.
Elected to use the Aggregate Indebtedness method to compute net capital.

Banking

December 31, 2011

Required Net
Capital

$104,804
250
1,000
9,183

Net Capital

$587,819
145,423
24,921
32,157

Excess Net
Capital

$483,015
145,173
23,921
22,974

$115,237

$790,320

$675,083

E*TRADE Bank is subject to various regulatory capital requirements administered by federal banking
agencies. 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 Bank’s
financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, E*TRADE Bank must meet specific capital guidelines that involve quantitative
measures of E*TRADE Bank’s assets,
items as calculated under
regulatory accounting practices. In addition, E*TRADE Bank may not pay dividends to the parent company
without approval from 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 Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.

liabilities and certain off-balance sheet

Quantitative measures established by regulation to ensure capital adequacy require E*TRADE Bank to
maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and Tier I capital to
adjusted total assets. As shown in the table below, at both December 31, 2011 and 2010, the most recent
notification from its regulators categorized E*TRADE Bank as “well capitalized” under the regulatory
framework for prompt corrective action. However, events beyond management’s control, such as a continued
deterioration in residential real estate and credit markets, could adversely affect future earnings and E*TRADE
Bank’s ability to meet its future capital requirements.

154

E*TRADE Bank’s actual and required capital amounts and ratios are presented in the table below (dollars in

thousands):

Minimum Required to be
Well Capitalized Under
Prompt Corrective
Action Provisions

Actual

Amount

Ratio

Amount

Ratio

Excess Capital

$3,602,384
$3,338,618
$3,351,860

17.27% >$2,086,243 >10.00% $1,516,141
16.00% >$1,251,746 > 6.00% $2,086,872
7.75% >$2,163,785 > 5.00% $1,188,075

$3,308,991
$3,028,647
$3,052,012

15.02% >$2,203,369 >10.00% $1,105,622
13.75% >$1,322,021 > 6.00% $1,706,626
7.30% >$2,091,530 > 5.00% $ 960,482

December 31, 2011:

Total capital to risk-weighted assets
Tier I capital to risk-weighted assets

Tier I capital to adjusted total assets
December 31, 2010:

Total capital to risk-weighted assets
Tier I capital to risk-weighted assets
Tier I capital to adjusted total assets

NOTE 20—LEASE ARRANGEMENTS

The Company has non-cancelable operating leases for facilities through 2022. Future minimum lease
payments and sublease proceeds under these leases, including leases involved in facility restructurings, are as
follows (dollars in thousands):

Years ending December 31,

2012
2013
2014
2015
2016
Thereafter

Minimum Lease
Payments

Sublease
Proceeds

Net Lease
Commitments

$ 24,549
20,750
19,985
18,817
17,212
53,237

$(3,447)
(2,942)
(2,889)
(285)
—
—

$ 21,102
17,808
17,096
18,532
17,212
53,237

Total future minimum lease payments

$154,550

$(9,563)

$144,987

Certain leases contain provisions for renewal options and rent escalations based on increases in certain costs
incurred by the lessor. Rent expense, net of sublease income, was $19.6 million, $22.6 million and $24.5 million
for the years ended December 31, 2011, 2010 and 2009, respectively. Rent expense, which is recorded in the
occupancy and equipment line item in the consolidated statement of income (loss), excludes costs related to
leases involved in facility restructurings, which are recorded in the facility restructuring and other exit activities
line item in the consolidated statement of income (loss).

NOTE 21—COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS

Legal Matters

Litigation Matters

155

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 filing of 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. By order dated November 4,
2008, 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. Oral argument on the appeal was heard on July 15, 2010.
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. E*TRADE 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. On September 20, 2011, the trial court granted limited
discovery at a conference on November 4, 2011, and set a motion schedule and trial date. The trial will continue
on May 14, 2012. The Company will continue to defend itself vigorously.

On October 2, 2007, a class action complaint alleging violations of the federal securities laws was filed in
the United States District Court for the Southern District of New York against the Company and its then Chief
Executive Officer and Chief Financial Officer, Mitchell H. Caplan and Robert J. Simmons, respectively, by Larry
Freudenberg on his own behalf and on behalf of others similarly situated (the “Freudenberg Action”). On July 17,
2008, the trial court consolidated this action with four other purported class actions, all of which were filed in the
United States District Court for the Southern District of New York and which were based on the same facts and
circumstances. On January 16, 2009, plaintiffs served their consolidated amended class action complaint in
which they also named Dennis Webb, the Company’s former Capital Markets Division President, as a defendant.
Plaintiffs contend, among other things, that the value of the Company’s stock between April 19, 2006 and
November 9, 2007 was artificially inflated because the defendants issued materially false and misleading
statements and failed to disclose that the Company was experiencing a rise in delinquency rates in its mortgage
and home equity portfolios; failed to timely record an impairment on its mortgage and home equity portfolios;
materially overvalued its securities portfolio, which included assets backed by mortgages; and based on the
foregoing, lacked a reasonable basis for the positive statements made about the Company’s earnings and
prospects. Plaintiffs seek to recover damages in an amount to be proven at trial, including interest and attorneys’
fees and costs. The parties entered into a Memorandum of Understanding (“MOU”) on December 17, 2011 to
settle these consolidated actions. Under the terms of the MOU, the Company and its insurance carriers will pay
$79 million in return for full releases. Approximately $10.8 million of the total settlement figure will be paid by
the Company, and was recorded in the other operating expense line item of the consolidated statement of income
(loss) for the year ended December 31, 2011. This settlement is subject to Court approval and it has not yet been
finalized. The defendants continue to deny that they committed any violations of law or breached any fiduciary
duty to shareholders.

156

Executive Officer, President/Chief Operating Officer, Chief Financial Officer and individual members of its
board of directors. The Rubery complaint was consolidated with another shareholder derivative complaint
brought by shareholder Marilyn Clark in the same court and against the same named defendants. On July 26,
2010, Plaintiffs served their consolidated amended complaint, in which they also named Dennis Webb, the
Company’s former Capital Markets Division President, as a defendant. Plaintiffs allege, among other things,
causes of action for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and violation of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint seeks, among other
things, unspecified monetary damages in favor of the Company, changes to corporate governance procedures and
various forms of injunctive relief.

On April 2, 2008, a class action complaint alleging violations of the federal securities laws was filed by
John W. Oughtred on his own behalf and on behalf of all others similarly situated in the United States District
Court for the Southern District of New York against the Company. Plaintiff contends, among other things, that
the Company committed various sales practice violations in the sale of certain auction rate securities to investors
between April 2, 2003, and February 13, 2008 by allegedly misrepresenting that these securities were highly
liquid and safe investments for short term investing. On December 18, 2008, plaintiffs filed their first amended
class action complaint. Defendants filed their pending motion to dismiss plaintiffs’ amended complaint on
February 5, 2009, and briefing on defendants’ motion to dismiss was completed on April 15, 2009. Plaintiffs seek
to recover damages in an amount to be proven at trial, or, in the alternative, rescission of auction rate securities
purchases, plus interest and attorneys’ fees and costs. On March 18, 2010, the District Court dismissed the
complaint without prejudice. On April 22, 2010, Plaintiffs amended their complaint. The Company has moved to
dismiss the amended complaint. By an Order dated March 31, 2011, the Court granted E*TRADE’s motion and
dismissed the action with prejudice. On May 2, 2011, Plaintiffs filed a Notice of Appeal to the U.S. Court of
Appeals for the Second Circuit. Plaintiffs filed their brief on August 12, 2011. The Company’s responsive brief
was filed October 26, 2011. Plaintiffs’ reply brief was filed on November 21, 2011. Oral argument has not yet
been scheduled.

On February 3, 2010, a class action complaint was filed in the United States District Court for the Northern
District of California against E*TRADE Securities LLC by Joseph Roling on his own behalf and on behalf of all
others similarly situated. The lead plaintiff alleges that E*TRADE Securities LLC unlawfully charged and
collected certain account activity fees from its customers. Claimant, on behalf of himself and the putative class,
asserts breach of contract, unjust enrichment and violation of California Civil Code Section 1671 and seeks
equitable and injunctive relief for alleged illegal, unfair and fraudulent practices under California’s Unfair
Competition Law, California Business and Professional Code Section 17200 et seq. The plaintiff seeks, among
other things, certification of the class action on behalf of alleged similarly situated plaintiffs, unspecified
damages and restitution of amounts allegedly wrongfully collected by E*TRADE Securities LLC, attorneys’ fees
and expenses and injunctive relief. The Company moved to transfer venue on the case to the Southern District of
New York; that motion was denied. The Court granted E*TRADE’s motion to dismiss in part and denied the
motion to dismiss in part. The Court bifurcated discovery to permit initial discovery on individual claims and
class certification. Following preliminary discovery, Plaintiffs moved to amend their verified complaint for a
second time, to assert new allegations and to add a plaintiff. The Company filed its opposition to this motion on
December 27, 2011. The Company intends to vigorously defend itself against the claims raised in this action.

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 LLC, E*TRADE Bank N.A. and multiple other unaffiliated financial services firms.
law. Plaintiff seeks
Plaintiff contends that
unspecified damages and an injunction against future infringements, plus royalties, costs, interest and attorneys’
fees. On September 30, 2011, the Company and several co-defendants filed a motion to transfer the case to the
Southern District of New York. Venue discovery occurred throughout December 2011. On January 1, 2012, a
new judge was assigned to the case. The Company will defend itself vigorously in this matter.

the defendants engaged in patent

infringement under federal

157

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 LLC,
along with numerous other financial institutions, is a named defendant, but has not been served with process. 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. E*TRADE Capital Markets, LLC, along with numerous other financial institutions, is a
named defendant. 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. E*TRADE Capital Markets,
LLC is a named defendant. 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. E*TRADE Clearing LLC is a named defendant. There have been several motions filed by various
parties to transfer venue and to consolidate these actions. The Company’s time to answer or otherwise respond to
the complaints has been stayed pending further orders of the Court. The Company will defend itself vigorously in
these matters.

Regulatory Matters

The securities 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 audits and inspections. Compliance and trading problems that are reported to
regulators, such as the SEC, FINRA or FDIC 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.

158

made a preliminary determination to recommend that disciplinary action be brought against E*TRADE
Securities LLC for alleged violations of certain FINRA rules in connection with the purchases of auction rate
securities by customers of E*TRADE Securities LLC. E*TRADE Securities LLC is cooperating with these
inquiries and has submitted a Wells response to FINRA setting forth the bases for E*TRADE Securities’ belief
that disciplinary action is not warranted.

On July 21, 2010, the Colorado Division of Securities filed an administrative complaint in the Colorado
Office of Administrative Courts against E*TRADE Securities LLC based upon purchases of auction rate
securities through E*TRADE Securities LLC by Colorado residents. On October 19, 2011, E*TRADE Securities
LLC and the Colorado Division of Securities reached an agreement in principle to settle the Colorado proceeding
whereby E*TRADE Securities LLC will offer to purchase auction rate securities held by Colorado customers
who found themselves unable to sell their securities after those securities had been frozen in the broader auction
rate securities market. The agreement in principle also included an agreement with the North American Securities
Administrators Association (“NASAA”) whereby E*TRADE Securities LLC will offer to purchase auction rate
securities purchased through E*TRADE Securities LLC on a nationwide basis and pay a $5 million penalty to be
allocated among 48 states and the District of Columbia, Puerto Rico and the Virgin Islands but exclusive of
North Carolina and South Carolina with whom E*TRADE Securities previously had reached separate
settlements. Under the agreement in principle each state will receive its allocated share of the $5 million penalty
pursuant to administrative consent cease and desist orders to be entered into by each state. A Consent Order
memorializing the agreement in principle as it related to Colorado customers was entered by the Colorado
Securities Commissioner on November 16, 2011, and amended on November 23, 2011, whereby E*TRADE
Securities LLC, without admitting or denying the underlying allegations, agreed to pay an administrative penalty
to Colorado of $84,202, which amount constituted Colorado’s share of the total NASAA state settlement amount
of $5 million, and to reimburse the Colorado Division of Securities’ costs associated with the administrative
action in the amount of $596,580. Under the terms of the Consent Order, E*TRADE Securities LLC will offer to
purchase (or offer to arrange a third party to purchase), at par plus accrued and unpaid dividends and interest,
from eligible investors nationwide their auction rate securities purchased through E*TRADE Securities LLC, or
through an entity acquired by the Company on or before February 13, 2008, if such auction rate securities have
failed at auction at least once since February 13, 2008 (“the Purchase Offer”). E*TRADE Securities LLC also
agreed to identify eligible investors who purchased auction rate securities through E*TRADE Securities LLC on
or before February 13, 2008, and sold those securities below par between February 13, 2008, and November 16,
2011, and to reimburse those sellers the difference between par value and the actual sales price plus reasonable
interest. E*TRADE Securities LLC agreed to hold open the Purchase Offer until May 15, 2012, and to various
other undertakings set forth in the Consent Order, including the establishment of a dedicated toll-free telephone
assistance line and website to provide information and to respond to questions regarding the Consent Order. As
of December 31, 2011, the total amount of auction rate securities held by Colorado customers was approximately
$1.2 million and the total amount of auction rate securities held by E*TRADE Securities LLC customers
nationwide (including Colorado customers) was $61.3 million. The Company recorded a reserve of $48 million
in the other operating expense line item of the consolidated statement of income (loss). The reserve represented

159

the Company’s estimate of the current fair value relative to par value of auction rate securities held by
E*TRADE Securities LLC customers, as well as former customers who purchased auction rate securities through
E*TRADE Securities LLC and are covered by the Consent Order. The agreement includes the resolution of all
material individual auction rate securities arbitrations and litigations. The reserve also includes penalties and
other estimated settlement costs.

Insurance

Reserves

For all

legal matters, reserves are established in accordance with the loss contingencies accounting
guidance. Once established, reserves are adjusted based on available information when an event occurs requiring
an adjustment.

Commitments

Loans

The Company provides access to real estate loans for its customers through a third party company. The
Company structured this arrangement
to minimize the assumption of any of the typical risks commonly
associated with mortgage lending. The third party company providing this product performs all processing and
underwriting of these loans. Shortly after closing, the third party company purchases the loans from the Company
and is responsible for the credit risk associated with these loans. The Company had $140.8 million in
commitments to originate loans, $11.7 million in commitments to sell loans and no commitments to purchase
loans at December 31, 2011.

Other Investments

The Company has investments in low-income housing tax credit partnerships and other limited partnerships.
The Company had $6.4 million in commitments to fund low income housing tax credit partnerships and other
limited partnerships as of December 31, 2011.

160

Securities, Unused Lines of Credit and Certificates of Deposit

At December 31, 2011,

the Company had commitments to purchase $0.5 billion in securities and
commitments to sell $0.2 billion in securities. In addition, the Company had approximately $0.1 billion of
certificates of deposit scheduled to mature in less than one year and $0.7 billion 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.

ETBH raised capital through the formation of trusts, which sold trust preferred securities in the capital
markets. The capital securities are mandatorily redeemable in whole at the due date, which is generally 30 years
after issuance. Each trust issues trust preferred securities at par, with a liquidation amount of $1,000 per capital
security. The proceeds from the sale of issuances are invested in ETBH’s subordinated debentures.

During the 30-year period prior to the redemption of the trust preferred securities, 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 December 31, 2011, management estimated that the maximum potential liability under
this arrangement is equal to approximately $436.9 million or the total face value of these securities plus
dividends, which may be unpaid at the termination of the trust arrangement.

NOTE 22—SEGMENT INFORMATION

The Company reports its operating results in two segments, based on the manner in which its chief operating
decision maker evaluates financial performance and makes resource allocation decisions: 1) trading and
investing; and 2) balance sheet management. Trading and investing includes retail brokerage products and
services; investor-focused banking products; market making; and corporate services. Balance sheet management
includes the management of asset allocation and credit,
loans previously
originated or purchased from third parties; and customer cash and deposits.

liquidity and interest rate risk;

The Company does not allocate costs associated with certain functions that are centrally-managed to its
operating segments. These costs are separately reported in a corporate/other category, along with technology
related costs incurred to support centrally-managed functions; restructuring and other exit activities; and
corporate debt and corporate investments. Balance sheet management pays the trading and investing segment for
the use of its deposits via a deposit transfer pricing arrangement, which is eliminated in consolidation. The
deposit transfer pricing arrangement is based on matching deposit balances with similar interest rate sensitivities
and maturities.

161

The Company evaluates the performance of its segments based on the segment’s income (loss) before
income taxes. Financial information for the Company’s reportable segments is presented in the following tables
(dollars in thousands):

Net operating interest income
Total non-interest income

Total net revenue
Provision for loan losses
Total operating expense

Year Ended December 31, 2011

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Total

$ 746,047
700,845

1,446,892
—
825,940

473,891
115,908

589,799
440,614
238,424

21
(113)

$ 1,219,959
816,640

(92)
—
170,540

2,036,599
440,614
1,234,904

Income (loss) before other income (expense) and

income taxes

Total other income (expense)

620,952
—

(89,239)
—

(170,632)
(175,751)

361,081
(175,751)

Income (loss) before income taxes

$ 620,952

(89,239) $ (346,383)

185,330

Income tax expense

Net income

Net operating interest income
Total non-interest income

Total net revenue
Provision for loan losses
Total operating expense

28,629

156,701

Year Ended December 31, 2010

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Total

$ 763,015
711,394

1,474,409
—
752,631

463,244
140,265

603,509
779,412
215,459

24
(67)

$ 1,226,283
851,592

(43)
—
174,487

2,077,875
779,412
1,142,577

Income (loss) before other income (expense) and

income taxes

Total other income (expense)

721,778
—

(391,362)

—

(174,530)
(159,027)

155,886
(159,027)

Income (loss) before income taxes

$ 721,778

$ (391,362) $ (333,557)

Income tax expense

Net loss

Net operating interest income
Total non-interest income

Total net revenue
Provision for loan losses
Total operating expense

(3,141)

25,331

(28,472)

Year Ended December 31, 2009

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Total

$ 699,581
857,200

560,916
99,298

105
(84)

$ 1,260,602
956,414

1,556,781
—
796,535

660,214
1,498,112
244,134

21
—
202,660

2,217,016
1,498,112
1,243,329

Income (loss) before other income (expense) and

income taxes

Total other income (expense)

760,246
—

(1,082,032)
(50,594)

(202,639)
(1,260,412)

(524,425)
(1,311,006)

Income (loss) before income taxes

$ 760,246

$(1,132,626) $(1,463,051)

(1,835,431)

Income tax benefit

Net loss

(537,669)

$(1,297,762)

162

Segment Assets

As of December 31, 2011
As of December 31, 2010

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Total

$9,608,020
$9,049,333

$37,123,118
$36,118,175

$1,209,314
$1,205,493

$47,940,452
$46,373,001

Assets and total net revenue attributable to international locations were not material for the periods
presented. No single customer accounts for greater than 10% of gross revenues for the years ended December 31,
2011, 2010 and 2009.

NOTE 23—CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

The following presents the Parent’s condensed statement of income (loss), balance sheet and statement of

cash flows:

CONDENSED STATEMENT OF INCOME (LOSS)
(In thousands)

Total net revenue
Total operating expense

Income (loss) before other income (expense), income tax benefit, and

equity in income (loss) of consolidated subsidiaries

Total other income (expense)

Loss before income tax benefit and equity in income (loss) of

consolidated subsidiaries

Income tax benefit
Equity in income (loss) of consolidated subsidiaries

Net income (loss)

Year Ended December 31,

2011

2010

2009

$ 271,607
375,083

$ 254,016
353,839

358,990
344,291

(103,476)
(175,792)

(99,823)
(157,705)

14,699
(1,255,882)

(279,268)

(257,528)

(1,241,183)

(121,141)
314,828

(64,109)
164,947

(340,749)
(397,328)

$ 156,701

$ (28,472) $(1,297,762)

163

CONDENSED BALANCE SHEET
(In thousands)

ASSETS

Cash and equivalents
Property and equipment, net
Investment in consolidated subsidiaries
Receivable from subsidiaries
Other assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Corporate debt
Other liabilities

Total liabilities

Total shareholders’ equity

Total liabilities and shareholders’ equity

December 31,

2011

2010

$ 478,410
148,184
5,347,942
40,906
737,491

$ 468,176
288,008
5,133,786
13,816
610,417

$6,752,933

$6,514,203

$1,493,552
331,431

$2,145,881
315,877

1,824,983

2,461,758

4,927,950

4,052,445

$6,752,933

$6,514,203

164

CONDENSED STATEMENT OF CASH FLOWS
(In thousands)

Cash flows from operating activities:

Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization
(Income) loss from subsidiaries(1)
Dividends from E*TRADE Securities LLC
(Gains) losses on early extinguishment of debt
Other
Net effect of increase in other assets
Net effect of increase in other liabilities

Year Ended December 31,

2011

2010

2009

$ 156,701

$ (28,472) $(1,297,762)

84,026
(205,653)
62,000
(3,091)
16,035
(164,597)
5,697

90,131
(188,740)
124,000

—
22,071
(10,216)
121,974

87,191
612,700
63,000
968,254
30,744
(429,058)
176,156

Net cash (used in) provided by operating activities

(48,882)

130,748

211,225

Cash flows from investing activities:

Capital expenditures for property and equipment
Sale of property and equipment to subsidiaries
Cash contributions to subsidiaries
Other

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Net proceeds from issuance of senior notes
Payments on senior notes
Claims settlement under Section 16(b)
Proceeds from issuance of common stock
Other

Net cash provided by financing activities

Increase in cash and equivalents
Cash and equivalents, beginning of period

Cash and equivalents, end of period

(23,742)
90,547
(9,500)
(177)

57,128

427,331
(425,956)

—
—
613

1,988

10,234
468,176

(81,467)
—
(8,332)
11,361

(78,438)

—
—
35,000
—
3,370

38,370

90,680
377,496

(86,252)
—

(653,438)
9,000

(730,690)

—
—
—
733,118
(19,421)

713,697

194,232
183,264

$ 478,410

$ 468,176

377,496

(1)

Includes equity in (income) loss of subsidiaries, net of returns of capital and dividends received, except for E*TRADE Securities LLC.
Dividends received from subsidiaries other than E*TRADE Securities LLC for the years ended December 31, 2011, 2010 and 2009 were
$98.5 million, $33.8 million and $230.2 million, respectively.

165

Parent Company Guarantees

Guarantees are contingent commitments issued by the Company for the purpose of guaranteeing the
financial obligations of a subsidiary to a financial institution. The financial obligations of the Company and the
relevant subsidiary do not change by the existence of a corporate guarantee. Rather, upon the occurrence of
certain events, the guarantee shifts ultimate payment responsibility of an existing financial obligation from the
relevant subsidiary to the guaranteeing parent company.

In support of the Company’s brokerage business, the Company has provided guarantees on the settlement of
its subsidiaries’ financial obligations with several financial institutions related to its securities lending activities.
Terms and conditions of the guarantees, although typically undefined in the guarantees themselves, are governed
by the conditions of the underlying obligation that the guarantee covers. Thus, the Company’s obligation to pay
under these guarantees coincides exactly with the terms and conditions of those underlying obligations. At
December 31, 2011, no claims had been filed with the Company for payment under any of these guarantees.
None of these guarantees are collateralized.

In addition to guarantees issued on behalf its subsidiaries participating in securities lending programs, the
Company also issues guarantees for the settlement of foreign exchange transactions. If a subsidiary fails to
deliver currency on the settlement date of a foreign exchange arrangement, the beneficiary financial institution
may seek payment from the Company. Terms are undefined, and are governed by the terms of the underlying
financial obligation. At December 31, 2011, no claims had been made against the Company for payment under
these guarantees and thus, no obligations have been recorded. None of these guarantees are collateralized.

NOTE 24 – QUARTERLY DATA (UNAUDITED)

The information presented below reflects all adjustments, which, in the opinion of management, are of a
normal and recurring nature necessary to present fairly the results of operations for the quarterly periods
presented (dollars in thousands, except per share amounts):

Total net revenue
Net income (loss)
Earnings (loss) per

Basic
Diluted

2011

2010

First

Second

Third

Fourth

First

Second

Third

Fourth

$536,695
$ 45,233

$517,619
$ 47,118

$507,275
$ 70,696

$475,010
$534,001
$536,503
$ (6,346) $ (47,837) $ 35,076

$489,422
8,404
$

$517,949
$ (24,115)

$
$

0.20
0.16

$
$

0.18
0.16

$
$

0.25
0.24

$
$

(0.02) $
(0.02) $

(0.25) $
(0.25) $

0.17
0.12

$
$

0.04
0.03

$
$

(0.11)
(0.11)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the
Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934
(“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this annual
report, have concluded that our disclosure controls and procedures are effective based on their
evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or
15d-15.

166

(b) Our Chief Executive Officer and our Chief Financial Officer have evaluated the changes to the
Company’s internal control over financial reporting that occurred during our last fiscal quarter ended
December 31, 2011, as required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15, and have
concluded that there were no such changes that materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting. The Management Report on
Internal Control Over Financial Reporting and the Reports of Independent Registered Public
Accounting Firm are included in Item 8. Financial Statements and Supplementary Data.

ITEM 9B. OTHER INFORMATION

None.

PART III

Certain portions of the Company’s Proxy Statement for its next Annual Meeting of Shareholders, which,
when filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, will be incorporated by
reference in this Annual Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, provide the
information required under Part III (Items 10, 11, 12, 13 and 14).

167

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this report:

Consolidated Financial Statements and Financial Statement Schedules

Consolidated Financial Statement Schedules have been omitted because the required information is not

applicable, not material or is provided in the consolidated financial statements or notes thereto.

Exhibit
Number

Description

3.1

3.2

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

4.9

Restated Certificate of Incorporation of E*TRADE Financial Corporation as currently in effect.
(Incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed August 4, 2010.)

Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed May 14, 2010.)

Specimen of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of Amendment
No. 1 to the Company’s Registration Statement on Form S-1, Registration Statement No. 333-
05525, filed July 22, 1996.)

Indenture dated November 22, 2005, between E*TRADE Financial Corporation and The Bank of
New York, as Trustee, relating to the 2015 Notes (includes form of note) (Incorporated by
reference to Exhibit 4.15 of the Company’s Form 10-K filed March 1, 2006.)

First Supplemental Indenture dated November 1, 2006, between the Company and The Bank of
New York, as Trustee, relating to the 2015 Notes (Incorporated by reference to Exhibit 4.10 of
the Company’s Form 10-K filed February 24, 2010.)

Second Supplemental Indenture dated June 15, 2011, among the Company, the Guaranteeing
Subsidiaries Party Hereto and The Bank of New York Mellon Trust Company, N.A., as Trustee,
relating to the 2015 Notes (Incorporated by reference to Exhibit 4.3 of the Company’s Form 10-Q
filed August 4, 2011.)

Indenture dated May 19, 2011, between E*TRADE Financial Corporation and The Bank of New
York Mellon Trust Company, N.A. as Trustee, relating to the 2016 Notes (includes form of note)
(Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on
May 19, 2011.)

First Supplemental Indenture dated June 15, 2011, among the Company, the guaranteeing
subsidiaries party thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee,
relating to the 2016 Notes (Incorporated by reference to Exhibit 4.2 of the Company’s Form 10-Q
filed on August 4, 2011.)

Security Agreement dated June 15, 2011, among the Company, the subsidiary grantors party
thereto and The Bank of New York Mellon, as Collateral Trustee, relating to the 2016 Notes
(Incorporated by reference to Exhibit 4.1 of the Company’s Form 10-Q filed on August 4, 2011.)

Indenture dated November 29, 2007, between E*TRADE Financial Corporation and The Bank of
New York, as Trustee, relating to the 2017 Notes (includes form of note) (Incorporated by reference
to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on December 4, 2007.)

First Supplemental Indenture dated December 27, 2007, between the Company and The Bank of
New York, as Trustee, relating to the 2017 Notes (Incorporated by reference to Exhibit 4.12 of
the Company’s Form 10-K filed February 24, 2010.)

168

Exhibit
Number

4.10

4.11

4.12

4.13

4.14

+10.1

10.2

*10.3

+10.4

+10.5

+10.6

10.7

10.8

10.9

Description

Second Supplemental Indenture dated January 18, 2008, between the Company and The Bank of
New York, as Trustee, relating to the 2017 Notes (Incorporated by reference to Exhibit 4.13 of
the Company’s Form 10-K filed February 24, 2010.)

Third Supplemental Indenture dated as of July 9, 2009, between E*TRADE Financial
Corporation and The Bank of New York Mellon, as trustee, relating to the 2017 Notes
(Incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on
July 9, 2009.)

Fourth Supplemental Indenture dated June 15, 2011, among the Company, the guaranteeing
subsidiaries party thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee,
relating to the 2017 Notes (Incorporated by reference to Exhibit 4.4 of the Company’s Form 10-Q
filed on August 4, 2011.)

Indenture dated August 25, 2009 between E*TRADE Financial Corporation and The Bank of
New York Mellon, as Trustee, relating to the 2019 Debentures (includes form of note)
(Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on
August 25, 2009.)

Third Supplemental Indenture dated June 15, 2011, among the Company, the guaranteeing
subsidiaries party thereto and The Bank of New York Mellon Trust Company, N.A., as Trustee,
relating to the 2019 Debentures (Incorporated by reference to Exhibit 4.5 of the Company’s Form
10-Q filed on August 4, 2011.)

Executive Deferred Compensation Plan (Incorporated by reference to Exhibit 10.1 of the
Company’s Form 10-K filed February 24, 2010.)

[redacted] Master Service Agreement and Global Services Schedule, dated April 9, 2003,
between E*TRADE Group, Inc. and ADP Financial Information Services, Inc. (Incorporated by
reference to Exhibit 10.1 of the Company’s Form 10-Q filed on August 8, 2003.)

Code of Professional Conduct.

Amended 2005 Equity Incentive Plan of E*TRADE Financial Corporation. (Incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 14, 2010.)

Forms of Award Agreements for Amended 2005 Equity Incentive Plan (Incorporated by
reference to Exhibit 10.66 to the Company’s Current Report on Form 8-K filed on May 31, 2005.)

Executive Bonus Plan (Incorporated by reference to Exhibit 10.67 to the Company’s Current
Report on Form 8-K filed on May 31, 2005.)

Master Investment and Securities Purchase Agreement, dated November 29, 2007 by and
between E*TRADE Financial Corporation and Wingate Capital Ltd. (Incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 4, 2007.)

First Amendment to Master Investment and Securities Purchase Agreement, dated as of
December 12, 2007, by and between Wingate Capital Ltd. and E*TRADE Financial Corporation
(Incorporated by reference to Exhibit 99.5 of the Schedule 13D filed by Citadel Limited
Partnership et al with respect to E*TRADE Financial Corporation on December 7, 2007.)

Second Amendment to Master Investment and Securities Purchase Agreement, dated as of
January 18, 2008, by and between Wingate Capital Ltd. and E*TRADE Financial Corporation
(Incorporated by reference to Exhibit 99.12 of the Amendment No. 1 to Schedule 13D filed by
Citadel Limited Partnership et al with respect to E*TRADE Financial Corporation on January 18,
2008.)

169

Exhibit
Number

10.10

10.11

10.12

10.13

10.14

10.15

10.16

+10.17

+10.18

*12.1

*21.1

*23.1

*31.1

*31.2

*32.1

Description

Securities Purchase Agreement, dated November 29, 2007 among E*TRADE Financial
Corporation, Investment Partners (A), LLC and the additional investors party thereto
(Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed
on December 4, 2007.)

ABS Purchase Agreement, dated as of November 29, 2007, by and among E*TRADE Financial
Corporation, E*TRADE Bank, E*TRADE Global Asset Management, Inc. and Citadel Equity
Fund Ltd. (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form
8-K filed on December 4, 2007.)

Exchange Agreement dated June 17, 2009 between E*TRADE Financial Corporation and Citadel
Equity Fund Ltd. (Incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed
on June 17, 2009.)

Amendment No. 1 to Exchange Agreement dated June 22, 2009 between E*TRADE Financial
Corporation and Citadel Equity Fund Ltd. (Incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed on June 23, 2009.)

Form of Exchange Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K filed on May 6, 2008.)

Guarantee and Support Agreement, dated as of July 14, 2008, by E*TRADE Financial
Corporation in favor of The Bank of Nova Scotia (Incorporated by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K filed on July 16, 2008).

Form of Indemnification Agreement for Directors dated July 30, 2008. (Incorporated by reference
to Exhibit 10.2 of the Company’s Form 10-Q filed on August 8, 2008.)

Employment Agreement dated March 19, 2010 by and between E*TRADE Financial Corporation
and Steven J. Freiberg. (Incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q
filed on May 5, 2010.)

Form of Employment Agreement between E*TRADE Financial Corporation and each of
Matthew Audette, Michael Curcio, Greg Framke and Nicholas Utton (Incorporated by reference
to Exhibit 10.21 of the Company’s Form 10-K filed February 24, 2010.)

Statement of Ratio of Earnings to Fixed Charges.

Subsidiaries of the Registrant.

Consent of Independent Registered Public Accounting Firm.

Certification—Section 302 of the Sarbanes-Oxley Act of 2002

Certification—Section 906 of the Sarbanes-Oxley Act of 2002

*101.INS

XBRL Instance Document

*101.SCH

XBRL Taxonomy Extension Schema Document

*101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

*101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

*101.LAB

XBRL Taxonomy Extension Label Linkbase Document

*101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herein.
+ Exhibit is a management contract or a compensatory plan or arrangement.

170

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant

has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

Dated: February 23, 2012

E*TRADE Financial Corporation
(Registrant)

/s/ STEVEN J. FREIBERG

Steven J. Freiberg

Chief Executive Officer

(Principal Executive Officer)

/S/ MATTHEW J. AUDETTE

Matthew J. Audette

Chief Financial Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/S/

STEVEN J. FREIBERG
Steven J. Freiberg

/s/ MATTHEW J. AUDETTE

Matthew J. Audette

/s/ RONALD D. FISHER

Ronald D. Fisher

/s/ KENNETH C. GRIFFIN

Kenneth C. Griffin

/s/

FREDERICK W. KANNER
Frederick W. Kanner

Rodger A. Lawson

/s/ MICHAEL K. PARKS

Michael K. Parks

/s/

FRANK J. PETRILLI
Frank J. Petrilli

Rebecca Saeger

/s/

JOSEPH L. SCLAFANI
Joseph L. Sclafani

/s/

JOSEPH M. VELLI
Joseph M. Velli

/s/ DONNA L. WEAVER

Donna L. Weaver

/s/

STEPHEN H. WILLARD
Stephen H. Willard

Director and Chief Executive Officer
(Principal Executive Officer)

Chief Financial Officer (Principal
Financial and Accounting Officer)

Director

171

February 23, 2012

E*TRADE FINANCIAL CORPORATION
Corporate Policies and Procedures

Exhibit 10.3

2010

Code of
Professional Conduct

INTRODUCTION

Table of Contents

STATEMENT OF ETHICS

Business Operations
Treatment and Conduct of Employees, Officers and Directors
Interaction with Business Partners, Potential Business Partners and Competitors

PURPOSE OF THE CODE
REPORTING VIOLATIONS
THE CODE OF PROFESSIONAL CONDUCT AND YOUR EMPLOYMENT

Code of Professional Conduct Is Not an Employment Contract
Consequences of Violating the Code of Professional Conduct

STANDARDS OF CONDUCT

RESPONSIBILITIES UNDER THE LAW

Securities Laws
Exchange and Self-Regulatory Organization Rules
Banking Laws and Regulations
Licensing, Registration and Reporting of Specified Arrests, Convictions or Civil Actions
Personal Legal Matters
Proper Record-Keeping and Disclosure Requirements
Insider Trading
Records Management and Records Retention Requirements
Antitrust and Trade Regulation Laws
Tied Products and Services
Avoiding Improper and Corrupt Payments, Including the Foreign Corrupt Practices Act
Economic Sanctions
International Anti-Boycott Laws
Anti-Money Laundering and Anti-Terrorism Laws
Intellectual Property Protection
Privacy Laws and Regulations
Employee Accounts

DEALING WITH THIRD PARTIES

Authority to Act on Behalf of E*TRADE
Conflicts of Interest
Acceptance of Gifts, Meals or Entertainment
Providing Gifts, Meals or Entertainment
Approval of Nonconforming Gifts, Meals or Entertainment
Selecting Suppliers
Standards of Conduct Demanded of Third Parties
Requests for Legal, Financial or Tax Advice
Advertising
Charitable Contributions
Communications with the Media and other Third Parties
Internet Access and Social Media
Outside Lawyers
Treatment of Privileged Communications and Documents

LITIGATION, INVESTIGATIONS, INQUIRIES AND COMPLAINTS
DEALINGS WITH E*TRADE

Protecting E*TRADE’s Assets
Use of E*TRADE’s Information and Communications Systems

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Monitoring of Communications and Files
Substance Abuse

NON-DISCRIMINATION AND ANTI-HARASSMENT POLICY

Equal Employment Opportunities
Discrimination and Harassment Are Against E*TRADE Policy and Are Illegal
Workplace Violence Is Prohibited
Retaliation Is Prohibited
Individuals Covered
Reporting an Incident
Investigation of Allegations
Consequences of Inappropriate Behavior

HANDLING PROPRIETARY AND CONFIDENTIAL INFORMATION

Safeguarding Materials Containing Proprietary or Confidential Information
Communicating Proprietary or Confidential Information
Disposal of Proprietary or Confidential Waste
Proprietary or Confidential Information Concerning Securities
Ownership of Intellectual Property
Preventing Improper Use of Proprietary or Confidential Information

TREATMENT OF INSIDE INFORMATION

POLICY ON THE TREATMENT OF INSIDE INFORMATION

Definition of Inside Information
Prohibited Uses of Inside Information
Guidelines for Information about E*TRADE
Handling Rumors
Consequences of Misusing Inside Information
The Restricted List

OUTSIDE BUSINESS ACTIVITIES

Outside Directorships, Industry-Related Organizations, Residential Boards and Charities

EMPLOYEE TRADING

E*TRADE Employee Trading Policies and Practices
The Restricted List
Transactions in E*TRADE Securities

ACKNOWLEDGEMENT

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Introduction
E*TRADE is committed to upholding the highest standards of ethical conduct, honesty and integrity.
E*TRADE is committed to being a leader in the financial service industry and to do so we must operate in accordance with the
highest standards of ethical conduct, honesty and integrity and, above all, a commitment to our customers and stockholders.
Accordingly, each employee, officer and director of E*TRADE (“you”) must abide by the Statement of Ethics below and this Code of
Professional Conduct.

STATEMENT OF ETHICS
E*TRADE pledges to ensure that we operate our business and serve our customers and stockholders by acting in accordance with the
highest standards of ethical conduct, honesty and integrity. E*TRADE is committed to the following principles:

Business Operations

•

We are committed to providing the best customer services to meet our customers’ needs.

We market our products and services in an honest and fair manner.
We do not compromise our values.
We do not use Inside Information (as discussed in Section 5 below) about E*TRADE or other companies for personal
profit or gain.
We will safeguard any confidential information entrusted to us.

We adhere to all laws and regulations applicable to our business.

Treatment and Conduct of Employees, Officers and Directors

•

We treat all employees, officers and directors equally and fairly.
We do not tolerate any form of harassment.
We do not tolerate anyone asking our employees, officers and directors to break the law, or violate E*TRADE’s policies,
procedures or values.
We provide employees, officers and directors with the information and necessary facilities to perform their jobs and
functions in a safe manner.
We do not tolerate anyone using, bringing or transferring illegal items on E*TRADE property.
We require you to report any suspicious activities.

Throughout the Code, the term “E*TRADE” or the “Company” refers to E*TRADE Financial Corporation and its subsidiaries
and affiliated entities, including subsidiaries outside the United States. To the extent that anything in this Code of Professional
Conduct is inconsistent with a local rule, regulation or law, the local rule, regulation or law will take precedent.

•

We do not tolerate the use of E*TRADE resources for personal gain or any non-business purpose.

Interaction with Business Partners, Potential Business Partners and Competitors

•

We avoid conflicts of interest and work to identify situations where they may occur.

We do not accept or give gifts, favors, or entertainment in excess of legal and regulatory limitations, as more fully

described in the policy entitled Gifts to and From Customers, Suppliers and Others.
We respect our competitors and do not use unfair business practices to hurt our competition.
We do not have formal or informal discussions with our competitors on prices, markets, products, services or production,
service or inventory levels.

PURPOSE OF THE CODE
In order to ensure that E*TRADE’s employees, officers and directors conduct themselves in accordance with the highest standards of
ethics, honesty and integrity, E*TRADE has adopted this Code of Professional Conduct (the “Code”), which sets forth standards for
conduct for all of our employees, officers and directors.

It is the responsibility of each employee, officer and director of E*TRADE to comply with the applicable provisions of this Code, as
well as all applicable laws, rules and regulations and all of E*TRADE’s corporate policies and procedures applicable to them.
Because the Code does not address every possible situation that may arise, E*TRADE employees, officers and directors also are
responsible for exercising their best judgment, applying ethical principles, and raising questions when in doubt. Integrity and good
judgment enhance the E*TRADE brand, help build E*TRADE’s reputation, and are the foundation of trust for our customer, supplier
and community relationships.

Should anyone covered by this Code have questions regarding ethical principles or conduct, E*TRADE has a number of available
resources, including the following departments: Legal, Compliance, Internal Audit, Human Resources and Corporate Information
Security and Fraud Management. In addition, E*TRADE employees are encouraged to direct questions regarding business conduct to
their supervisors.

The Code provides an overview of some of E*TRADE’s key policies and should be read in conjunction with all relevant E*TRADE
policies and procedures. It is your responsibility to become familiar with and adhere to all policies and procedures referenced in this
Code and any other policies or procedures applicable to your business unit or in the conduct of your duties as an employee, officer or
director of E*TRADE. Most corporate policies are posted on My Channel*E. New employees should ask their supervisor for all
policies that apply to their business unit. We recognize that members of the E*TRADE Financial Corporation Board of Directors are
subject to additional guidelines and policies which shall govern in the case of any conflict with the Code.

REPORTING VIOLATIONS
As an E*TRADE employee, officer or director you are E*TRADE’s first line of defense against civil or criminal liability and
unethical business practices. If you know of, observe, suspect or otherwise become aware of a violation of applicable laws, rules,
regulations, this Code or any of E*TRADE’s other policies or procedures, you must report this information immediately. As an
employee, such matters can be reported to your direct supervisor or any other appropriate representative of E*TRADE senior
management. If you believe that the person to whom you have reported a potential violation has not taken appropriate action, you
must contact the Legal, Compliance, Internal Audit or Human Resources Department directly. As an officer or director you should
report any such matter to the Legal, Compliance, Internal Audit or Human

Resources Department directly in the first instance. If you believe that you may have violated an applicable law, rule or regulation or
this Code or any other E*TRADE policy or procedure, you must immediately report such violation to the Legal, Compliance, Internal
Audit or Human Resources Department directly.

As an alternative to direct reporting to one of the Departments above, E*TRADE has engaged ListenUp, an outside firm through
which you may anonymously report any suspected violations of an applicable law, rule or regulation or this Code or any other
E*TRADE policy or procedure. You can access ListenUp at www.listenupreports.com. Additional information regarding ListenUp is
available on My Channel*E.

THE CODE OF PROFESSIONAL CONDUCT AND YOUR EMPLOYMENT
Code of Professional Conduct is Not an Employment Contract
As an employee and/or director of E*TRADE, this Code and the applicable policies and procedures contained in this Code form a
part of the terms and conditions of your employment and/or professional relationship with E*TRADE. However, the Code is not a
contract, express or implied, guaranteeing progressive discipline or employment for any specific duration or entitling you to bonuses
or other forms of compensation. Except in certain jurisdictions outside the U.S., employment at E*TRADE is “at will,” meaning that
either E*TRADE or you may terminate your employment relationship at any time, with or without cause.

Consequences of Violations of the Code of Professional Conduct
As an employee of E*TRADE, violations of the Code may subject you to disciplinary action by E*TRADE including — without
limitation — warnings, reprimands, temporary suspensions, probation, termination of your employment or other actions which may
be set forth in the specific E*TRADE disciplinary procedures applicable to the country in which you work or reside. Disciplinary
actions may be taken:
•

against employees who authorize or participate directly, and in certain circumstances indirectly, in actions which are a violation
of applicable laws, rules or regulations, this Code or any of E*TRADE’s other policies and procedures;
against employees who fail to report or withhold information concerning conduct that they knew or should have known was a
violation of applicable laws, rules or regulations, this Code or any of E*TRADE’s other policies and procedures, or withhold
information concerning a violation of which they become aware or should have been aware;

against the violator’s supervisor(s), to the extent that the circumstances of the violation reflect inadequate supervision or lack of
diligence by the supervisor(s);
against employees who attempt to retaliate, directly or indirectly, or encourage others to do so, against an employee who reports

an actual or potential violation of applicable laws, rules or regulations, this Code or any of E*TRADE’s other policies and
procedures; and
against employees who knowingly make a false report of a violation.

•

E*TRADE also must report certain activities to its regulators, which could give rise to regulatory or criminal investigations. The
penalties for regulatory or criminal violations may include significant fines, permanent bar from employment in the securities industry
and, for criminal violations, incarceration.

Standards of Conduct
RESPONSIBILITIES UNDER THE LAW
Employees, Officers and Directors are responsible for reviewing, understanding and adhering to all laws, regulations, industry
standards and E*TRADE policies and procedures related to their work activities and professional responsibilities.
The activities of E*TRADE and its employees, officers and directors are regulated by governmental entities, such as the Securities
and Exchange Commission (“SEC”), the Office of Thrift Supervision (“OTS”) and various state regulators and self-regulatory
organizations (“SROs”), such as the Financial Industry Regulatory Authority (“FINRA”). As a result of the recently enacted financial
regulatory reform legislation, E*TRADE will be regulated by a number of other governmental agencies and SROs. E*TRADE is
committed to full compliance with all applicable laws, rules and regulations and industry standards, as well as full adherence to the
provisions of this Code and all of E*TRADE’s other policies and procedures. Accordingly, you must comply with all applicable laws,
rules and regulations, industry standards, the provisions of this Code applicable to you, and all of E*TRADE’s other policies and
procedures applicable to your business unit and relevant to your role with E*TRADE (“Applicable Requirements”).

Failure to comply with Applicable Requirements can cause significant harm to E*TRADE, and it can have severe consequences for
you personally. Specifically, you may be held personally liable for improper or illegal acts committed during your employment or
other professional relationship with E*TRADE. Such liability could subject you to civil or criminal penalties (fines and/or
imprisonment), regulatory sanctions (censure, suspension or industry bar) and disciplinary action by E*TRADE, up to and including
termination of your employment or other professional relationship with E*TRADE.

The following is a general summary of certain laws and other rules that apply to E*TRADE. The summary does not address every
Applicable Requirement, all of which, as previously stated, you are required to review, understand and adhere. Ignorance of
applicable laws, regulations, rules, policies or procedures will not excuse E*TRADE or you from potential penalties or sanctions,
including internal disciplinary action.

Securities Laws
Because E*TRADE is licensed and regulated in a number of jurisdictions, it is subject to numerous securities laws and rules. These
laws and rules address, among other things, licensing requirements, financial reporting and disclosure, and insider trading rules.
E*TRADE is fully committed to compliance with these and all other applicable laws, rules and regulations.

Exchange and Self-Regulatory Organization Rules
E*TRADE is a member of many exchanges and SROs that issue and enforce rules about trading in securities, commodities and
related instruments, and about other aspects of E*TRADE’s business. Violations of exchange or SRO rules can lead to fines and
penalties against you and against E*TRADE.

Banking Laws and Regulations
Because of the nature of E*TRADE’s business, including the operation of federally charted savings banks, E*TRADE is subject to
numerous banking laws and regulations. Violations of such rules can lead to fines and penalties against you and against E*TRADE.

Licensing, Registration and Reporting of Specified Arrests, Convictions or Civil Actions
Many jurisdictions require licensing or registration of individuals who perform certain activities in the financial services industry.
These requirements apply to many individual E*TRADE employees. All employees are personally responsible for meeting the
registration requirements in the jurisdiction where they are physically located and wherever they conduct business; and supervisors
are responsible for assuring that personnel under their supervision meet the proper registration requirements. Employees are
responsible for providing requisite information regarding their licensure and any changes thereto (such as a change in name or
residential address) to E*TRADE for its books and records. Employees who maintain registrations with FINRA or other SROs are
also responsible for promptly notifying the Compliance Department of any changes in the information that appears on the employee’s
Form U-4. Changes in U-4 information must be made within 30 days of the date of the change in information. In addition, under
applicable FINRA rules, E*TRADE is required to report certain events, such as customer complaints and arbitrations, regardless of
the merits of such claims.

For further information, please see
https://mychannele.corp.etradegrp.com/web/guest/departments/brokeragecompliance/registrationlicensing/needs.

Personal Legal Matters
E*TRADE must report and disclose certain information regarding arrests or criminal charges against an employee, including
securities or commodities-related civil litigation, as well as personal financial matters. Thus, employees must notify their direct
supervisor and the Legal and Compliance Departments immediately if any of the following events occurs:
•

At any time during your employment, you are indicted, convicted of, or plead guilty or no contest to any felony in a domestic,
military or foreign court;
At any time during your employment, you are indicted, convicted of, or plead guilty or no contest to any misdemeanor that

•

involves the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary,
larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion,
misappropriation of funds or securities, conspiracy to commit any of these offenses, or any substantially equivalent activity in a
domestic, military or foreign court;

•

At any time during your employment, you are named as a defendant or respondent in any securities or commodities-related civil
litigation;
At any time during your employment, you are named as a defendant or respondent in any proceeding brought by a governmental

agency or SRO alleging a violation of any securities law or regulation;

At any time during your employment, you are found by any governmental agency or SRO to have violated any provision of any
securities law or regulation;
At any time during your employment, you receive a subpoena, inquiry or request from a governmental, regulatory or

administrative agency or a claimant, plaintiff or outside attorney that involves, or has the potential for involving, E*TRADE;
At any time during your employment you receive a customer complaint, whether made orally or in writing;
At any time during your employment you made a compromise with creditors, filed a bankruptcy petition or have been the
subject of an involuntary bankruptcy petition; or
At any time during your employment you have any unsatisfied judgments or liens against you.

Proper Record-Keeping and Disclosure Requirements
E*TRADE requires honest and accurate accounting and recording of financial and other information in order to make responsible
business decisions and provide an accurate account of E*TRADE’s performance to stockholders and regulators. E*TRADE requires
and has implemented disclosure controls and procedures to ensure that its public disclosures are compliant, and otherwise full, fair,
accurate, timely and understandable. Accordingly, employees responsible for preparing E*TRADE’s public disclosures, or providing
information as part of that process, are responsible for ensuring that such disclosures and information are full, fair, accurate, timely
and understandable in compliance with E*TRADE’s disclosure controls and procedures.

It is a violation of law and E*TRADE policy for you to attempt to improperly influence or mislead any accountant engaged in
preparing an audit or financial reports. E*TRADE is committed to full compliance with all requirements applicable to its public
disclosures, and requires that its financial and other reporting fairly present the financial condition, results of operations and cash flow
of E*TRADE and comply in all respects with applicable law, governmental rules and regulations, including generally accepted
accounting principles (“GAAP”) and applicable SEC, SRO and OTS rules.

Insider Trading
Federal law and E*TRADE policy prohibits any E*TRADE officer, director and employee from acting upon material non-public
information to benefit yourself or others. Information is “material” if there is a substantial likelihood that a reasonable investor would
consider it important in making an investment decision, or it could reasonably be expected to affect the price of an issuer’s securities.

At times, E*TRADE policies may limit your ability to enter into transactions. In addition, if you have ongoing possession of non-
public information, you may be prohibited from trading in the securities of the

companies about which you have such information. If you have access to confidential or non-public information, you must not use or
share that information except in connection with the legitimate conduct of E*TRADE business. E*TRADE strives to prevent the
misuse of material non-public information by, among other things, limiting access to confidential information, and limiting and
monitoring communications between areas that regularly receive non-public information and the E*TRADE sales, trading, and asset
management areas. E*TRADE policy regarding insider trading is outlined in more detail in the General Rules for Employee Trading
section below and on My Channel*E at
https://mychannele.corp.etradegrp.com/web/guest/departments/brokeragecompliance/surveillance/associate

Records Management and Retention Requirements
E*TRADE is required by law and by industry regulation to maintain its books and records in good order and to memorialize the
essential terms of its business agreements. Accordingly, employees must ensure that any E*TRADE documents, books and records
for which you are responsible are accurate and correct in all material respects. Also, every business transaction undertaken by
E*TRADE must be recorded correctly and in a timely manner in E*TRADE’s books and records. Thus, any payment made at any
employee’s request on E*TRADE’s behalf must be supported by appropriate and correct documentation.

In addition to appropriate records management, employees must fully comply with E*TRADE’s document retention and destruction
policy. It is a criminal offense to destroy documents that are subject to a subpoena or other legal process. Once a legal proceeding has
begun, or even when one is threatened or reasonably likely, E*TRADE must preserve documents relevant to the issues in that
proceeding whether or not anyone has requested the specific documents in issue. Any employee who fails to comply with this policy,
as well as industry regulations and applicable laws, is subject to termination of employment and may also face criminal or civil
prosecution, fines and penalties.

Notably, E*TRADE’s record management policies and procedures require that employees review files periodically to ensure that
information is current, essential and consistent with all document retention policies and applicable laws and regulations and discard
drafts, notes, notebooks, diaries, telephone logs, message slips and other documents when they are no longer useful or not otherwise
required to be retained. In conducting this review, be careful not to discard documents that must be maintained for stated periods of
time under applicable laws; documents that are the subject of a subpoena; or documents that employees have been instructed to retain
as part of any lawsuit or investigation. E*TRADE’s policies regarding record retention and management may be found at:
https://mychannele.corp.etradegrp.com/web/guest/departments/legalaffairs/recordsmgmt.

Antitrust and Trade Regulation Laws
Antitrust and trade regulation laws aim to ensure fair competition in the marketplace. Generally, these laws prohibit monopolization,
price-fixing, overlapping boards of directors between certain types of companies, exclusive dealing and “tying” arrangements
(discussed below), price or service discrimination that diminishes competition, deceptive acts and unfair competition. Antitrust and
trade regulation issues often arise in joint ventures, strategic investments, revenue sharing agreements, and formal or informal
meetings or conversations with competitors, suppliers and other third parties. Violations of these laws may result in civil or criminal
liability and disciplinary action by E*TRADE, up to and including termination of employment.

Unless authorized by the General Counsel, under no circumstances should an E*TRADE officer, director or employee:

•

discuss price, product or service arrangements, or division of market share with competitors, unless that information has
previously been made publicly available;
divulge the identity of E*TRADE’s actual or potential customers or any of the terms upon which E*TRADE may work with
those customers;
enter into any agreement obligating any customer either to work exclusively with E*TRADE or not to purchase securities or
services from a competitor;
enter into any agreement with a third party that involves pricing restrictions with respect to E*TRADE; or
illegally or improperly acquire market or competitive information with respect to E*TRADE.

Tied Products and Services
“Tying” arrangements, in which clients are required to purchase one product or service as a condition to another product or service
being made available to them, are unlawful in certain instances. Consult the Legal Department for advice about tying restrictions.

Avoiding Improper and Corrupt Payments, Including the Foreign Corrupt Practices Act
Various laws in the U.S. and other countries prohibit providing money or anything else of value to government officials (including
employees and agents of government-owned entities), political parties or candidates for public office for the purpose of improperly
influencing their actions in order to obtain or retain business. One such law is the U.S. Foreign Corrupt Practices Act (“FCPA”),
which you should assume applies, regardless of where you are located. The FCPA prohibits any payment or gift, or any offer or
authorization of a payment or gift, to these entities or individuals in order to secure any improper business advantage, such as
inducing the entity or individual to act favorably upon, or influence others to act favorably upon, business proposals or regulatory
decisions.

The FCPA and laws like it apply to all E*TRADE-controlled or managed companies, as well as to all E*TRADE employees, officers,
directors and agents, regardless of citizenship or residency. These laws also prohibit payments made directly as well as those made
indirectly, for example, to agents or intermediaries who would use the funds for prohibited purposes. Therefore, E*TRADE must
select only reputable agents and must exercise due care in determining the amount of any compensation it will pay to such agents.
You must not hire an agent to act on behalf of E*TRADE before you have obtained approval from Legal.

Economic Sanctions
E*TRADE policy requires compliance with economic sanctions imposed by the Office of Foreign Assets Control (“OFAC”) in every
country in which E*TRADE does business. OFAC-imposed economic sanctions and restrictions may be directed at the governments
of certain countries, designated individuals or entities, as well as certain activities. Employees are required to take appropriate steps to
comply with OFAC-imposed economic sanctions, including being familiar with the various sanctions programs, operating within
E*TRADE’s established communication channels regarding sanctions programs, and performing adequate due diligence on their
customers.

International Anti-Boycott Laws
U.S. law and E*TRADE prohibit participation in boycotts against countries friendly to the United States. Furthermore, violations of
the anti-boycott provisions are a criminal offense. Examples of activities that may be perceived as participating in a boycott include
refusing, or requiring another person to refuse, to do business with a boycotted country, its business concerns, its residents or
nationals. E*TRADE may be required to report these requests, even though the request was refused. All employees are required to
bring such requests immediately to the attention of Legal.

Anti-Money Laundering and Anti-Terrorism Laws
U.S. Anti-Money Laundering (“AML”) laws aim to prevent, detect and deter money laundering and terrorist financing. The term
“money laundering” covers any process designed to conceal the true origin and ownership of the proceeds of criminal activities that
changes the identity of illegally obtained money so that it appears to have originated from a legitimate source. The term “terrorist
financing” covers activities that are ideological rather than profit-based, which can include providing, collecting or using funds –
whether legitimately or illegally obtained – to carry out a terrorist act.

It is E*TRADE’s policy to comply fully with all federal and state laws and the laws of other countries concerning the prohibition of
money laundering and safeguard against the financing of terrorist activity, such as the Bank Secrecy Act, including regulations issued
pursuant to the US Patriot Act of 2001; OFAC regulations; and related laws. To this end, employees must immediately report any
suspicious or unusual activity relating to any E*TRADE customer or employee to the appropriate AML Compliance Officer or
Corporate Security and Fraud Management.

In addition to severe criminal and civil penalties, violations of anti-money laundering laws will result in disciplinary action, including
possible termination, and any act by or on behalf of E*TRADE or its employees that assists in money laundering could be a serious
criminal offense. Failure to report suspicions of money laundering to the relevant authorities also may constitute an offense and could
involve significant penalties for E*TRADE, as well as the individuals involved. Finally, employees are prohibited from alerting a
customer or other E*TRADE employees (outside of those responsible for managing the situation) of your suspicion, as this may also
be an offense in certain jurisdictions. Each regulated entity has developed comprehensive policies and procedures with respect to anti-
money laundering. For specific policies and procedures applicable to your business unit, check with your AML Compliance Officer
or review the link below.

E*TRADE’s AML policies and procedures can be accessed on My Channel*E, as follows: Bank:
https://mychannele.corp.etradegrp.com/web/guest/departments/bankcompliance/policies (see Bank Secrecy Act Policy); and Non-
Bank (Brokerage; Clearing; Corporate): https://mychannele.corp.etradegrp.com/web/guest/departments/brokeragecompliance/wsp.

Intellectual Property Protection
Most jurisdictions offer some form of legal protection for intellectual property, including copyrights, patents, trademarks and trade
secrets.

Copyright laws govern the display and reproduction of copyrighted material, which includes most books, magazines, newspapers,
websites, research reports and software. You cannot display or reproduce copyrighted material without the permission of the
copyright owner. Because copyright laws are complex,

you must contact Legal before displaying, publishing or reproducing material subject to copyright protection.

Patent laws govern the right to make, use and sell a patented invention. Certain software applications and business methods may be
subject to patent protection. If you develop a software application, business method or invention during the course of your
employment with E*TRADE, you must document the development and consult with your direct supervisor and Legal concerning its
patentability. Similarly, before introducing or using a software application, business method or invention that is similar to that of
another company, inventor or person, particularly in the financial services industry, you must consult with the Legal Department.
Please note that E*TRADE owns all rights in any intellectual property developed by employees during your employment that relate to
E*TRADE’s business, even if invented or otherwise developed outside E*TRADE premises and even if no E*TRADE equipment
was used in the process. Additional information is available in this Code under “Ownership of Intellectual Property.”

Trademark laws govern the use of product or brand names, service marks, and trade names that the public associates with a particular
product or service. You must obtain prior approval of all uses of E*TRADE’s trademarks, service marks and trade names from the
Legal Department. In addition, before adopting any new names for product or service offerings, you must have the approval of the
Legal Department. For further information consult
https://mychannele.corp.etradegrp.com/web/guest/departments/legalaffairs/trademarks.

Trade secret protection governs the disclosure and use of information that the owner has endeavored to hold secret, usually because
the information provides the owner with a competitive advantage. It is not necessary that the information be subject to copyright,
patent or trademark protection in order to constitute a trade secret.

E*TRADE’s policies govern situations in which employees develop, create or receive any materials in the course of employment by
E*TRADE that may be entitled to protection under intellectual property or other laws. Additional obligations and restrictions are set
forth in the new hire documents you received at the commencement of your relationship with E*TRADE. Questions concerning these
policies, rules and requirements can be directed to the Legal Department.

Privacy Laws and Regulations
E*TRADE is fully committed to complying with the privacy and data protection laws applicable to its worldwide operations.
E*TRADE employees are required as a condition of their employment to agree to maintain the confidentiality of Proprietary
Information (as defined below in this Code), including customer and employee information, to which they may have access during the
course of their employment. Dis-closure of any such information must be done in accordance with internal policies and procedures
and E*TRADE’s privacy statement which is available on My Channel*E:
https://mychannele.corp.etradegrp.com/web/guest/knowledge/policies/privacy.

In addition to E*TRADE’s privacy statement, there may be other laws, regulations, contractual obligations or internal policies and
procedures, that require even stricter handling of information and in certain circumstances, may prohibit sharing of information
among E*TRADE entities and E*TRADE employees. For any questions regarding the disclosure of Proprietary Information, or
compliance with any privacy laws, regulations, contractual obligations or internal policies and procedures, you must contact the Legal
or Compliance Department or E*TRADE’s Privacy Officer.

Employee Accounts
To comply with industry regulations, employees and their immediate family members (members of the same household) must
maintain their securities accounts at E*TRADE, unless the employee receives prior approval from the Compliance Department. In
addition, employees of certain business areas may be subject to pre-clearance requirements in regard to their personal trading activity.
Additional information regarding this requirement can be accessed on My Channel*E:
https://mychannele.corp.etradegrp.com/web/guest/departments/brokeragecompliance/surveillance/associate

In addition, employees, officers and directors of E*TRADE who maintain bank or brokerage accounts at E*TRADE must keep those
accounts in good standing and conduct all transactions with integrity and good faith. Remember, as employees, officers and directors
of E*TRADE, we each have a fiduciary duty to E*TRADE, and our actions must reflect this duty.

DEALING WITH THIRD PARTIES
Authority to Act on Behalf of E*TRADE
Employees and directors cannot commit or bind E*TRADE to any contracts or other obligations unless they have the express
authority to do so. Except with respect to trading activities performed by registered brokers and customer service representatives on
behalf of our brokerage customers in the regular course of business, only certain individuals (typically members of the entity’s board
of directors, and its officers, vice presidents (“VPs”), executive vice presidents (“EVPs”) or senior vice presidents (“SVPs”) may
enter into commitments on behalf of E*TRADE, which include signing contracts on behalf of any E*TRADE entity. All contracts
must be reviewed by Procurement and approved by the Legal Department (depending on the subject of the agreement) before they are
signed. Certain contracts also require approval of the Technology Infrastructure Committee, Vendor Management or Finance. In
addition, various business units and departments have special approval requirements for commitments of a certain size. You should
consult with your supervisor to learn of any such policies. E*TRADE’s Contract-Signing Authority Policy is posted on My
Channel*E, and you should contact the Legal Department with any additional questions regarding authority to bind E*TRADE to
obligations with third parties. This Policy can be accessed at:
https://mychannele.corp.etradegrp.com/web/guest/departments/legalaffairs/contracts.

Conflicts of Interest
Separate and apart from applicable laws, rules and regulations, employees have a primary business and ethical responsibility to
E*TRADE to avoid any activity or relationship that may interfere, or have the appearance of interfering, with the performance of your
duties in a loyal, efficient manner to the best of your ability. Such activities and relationships, called “conflicts of interest,” include
any interest, relationship or activity that is incompatible or has the appearance of being incompatible with the best interests of
E*TRADE, or which potentially affects or has the appearance of affecting your objectivity as an employee.

Depending on your particular responsibilities, potential conflict of interest situations may include, but are not limited to:
•

using E*TRADE’s premises, assets, information or influence for personal gain;

•

causing E*TRADE to purchase services or products from family members or businesses in which you or your family have or

may have an interest, unless approved to do so after disclosing the pertinent facts to your direct supervisor as well as the Legal
and Compliance Departments;
serving as a director, officer, employee, partner, consultant or agent of an enterprise that is a present or potential supplier, or a
competitor of E*TRADE; or that engages or may engage in any other business with E*TRADE;
owning a material amount of stock, being a creditor or having any other financial interest in an enterprise described above;
having any other significant direct or indirect personal interest in a transaction involving E*TRADE;
obtaining or using for personal benefit confidential information regarding an enterprise described above, or providing

confidential information regarding E*TRADE or its business to such an enterprise;

appropriating for personal benefit a business opportunity that E*TRADE might reasonably have an interest in pursuing, without

first making the opportunity available to E*TRADE; or

engaging in outside activities that detract from or interfere with the full and timely performance by an employee of all of his or
her duties for E*TRADE.

Other than members of the E*TRADE Financial Corporation Board of Directors, who must adhere to the Corporate Governance
Guidelines adopted by the Nominating and Corporate Governance Committee (“Corporate Governance Guidelines”) including
seeking approval of such committee, your involvement in any outside business activities requires the prior approval of E*TRADE. If
you have any questions, review E*TRADE’s policies on “Outside Business Activities” outlined in this Code and/or contact the
Compliance Department.

Acceptance of Gifts, Meals or Entertainment
In general, employees and officers may not accept gifts or excessive entertainment from customers, vendors, suppliers or others
having or seeking business dealings with E*TRADE. Cash gifts or their equivalent may not be accepted under any circumstances (e.g.
gift checks); however gift cards which are non-redeemable for cash are permitted to be accepted as long as they otherwise comply
with the provisions of this Code. Non-cash gifts may be accepted when permitted under applicable laws, rules and regulations if they
are (1) nominal in value (i.e., less than or equal to US$100); (2) appropriate, customary and reasonable meals and entertainment at
which the giver is present, such as an occasional business meal or sporting event; or (3) appropriate, customary and reasonable gifts
based on family or personal relationships, and clearly not meant to influence E*TRADE business.

In addition to the restrictions in the paragraph above, nominal non-cash gifts (with a value less than or equal to US$100) and
entertainment should only be accepted if a reasonable person would be satisfied that the gift or entertainment did not influence the
employee’s or officer’s judgment or the performance of your duties. Under no circumstances may employees and officers accept any
gifts or entertainment that could create a conflict of interest or the appearance of impropriety. The Compliance Department maintains
a log of gifts received by all employees. Any employee who receives a gift must report it to the Compliance Department. If
employees and officers have any questions

regarding the appropriateness of a gift or entertainment, employees and officers must contact the Compliance Department or send an
email to: associatesurveillance@etrade.com before accepting the gift or attending the event.

Providing Gifts, Meals or Entertainment
E*TRADE policy, applicable laws, rules and regulations may prohibit employees and officers from giving gifts in excess of specified
monetary levels (or of any value) to customers, vendors, suppliers, E*TRADE employees and other third parties, including persons
employed with a stock exchange, regulatory authority, financial institution, broker-dealer, or the news or financial information media.
More specifically, SRO rules currently prohibit E*TRADE employees from providing gifts in excess of $100.00 per person annually
to the third parties outlined above. If you have any questions regarding these SRO rules, contact the Compliance Department or send
an email to: associatesurveillance@etrade.com.

When permitted by law and consistent with accepted business practices and ethical standards, employees and officers may give gifts
of nominal value or provide meals or entertainment to customers, vendors, suppliers and other persons who have business
relationships with E*TRADE. No gifts should be given or entertainment provided if public disclosure of the circumstances would
embarrass E*TRADE or the giver of such gift or provider of such entertainment.

Special restrictions often apply to gifts and entertainment of government employees, even of nominal value. In addition, political
contributions may be subject to the rules of the Municipal Securities Rulemaking Board and employees are required to comply with
such rules. If you have any questions regarding these rules, contact the Compliance Department or send an email to:
associatesurveillance@etrade.com.

Customer entertainment expenses are generally not considered gifts if employees are present, the provision of the entertainment is
routine, and the expense is not excessive. Please see the Section of this Code on the Foreign Corrupt Practices Act and contact your
supervisor or the Compliance Department for further details.

Employees and officers must provide complete and accurate expense reports for all gifts and entertainment expenses paid for by
E*TRADE.

Approval of Nonconforming Gifts, Meals or Entertainment
The Chief Executive Officer and the Executive Vice President responsible for each employee’s business unit, together with the
appropriate Compliance Officer and the Company’s Secretary and General Counsel, may approve, on a case-by-case basis, the
acceptance of a gift, meal or entertainment that is not specifically permitted under this Section or that is prohibited under this Section.
Any such approval must be in writing and pursuant to full written disclosure of all relevant facts, including the name of the donor, the
circumstances surrounding the offer and acceptance, the nature and approximate value of the gift or other event, and the reason why it
cannot or should not be returned or refused.

Selecting Suppliers
E*TRADE requires employees, together with the Procurement team, to evaluate competing suppliers by their long-term financial
stability and the price and quality of their products or services. Personal relationships should not be (or be perceived to be) a factor in
the decision to use a particular supplier.

Additional information regarding suppliers may be found at:
https://mychannele.corp.etradegrp.com/web/guest/departments/procurement.

Standards of Conduct Demanded of Third Parties
E*TRADE’s vendors, suppliers, contractors and agents are expected to operate with the same commitment to the law and to ethics
that we demand of ourselves. E*TRADE employees should make it clear in their dealings with third parties that we expect third
parties to meet the highest ethical standards in their dealings with E*TRADE and to be in full compliance with the law.

Requests for Legal, Financial or Tax Advice
Customers may request legal, financial or tax advice about securities or other issues because they assume that our employees are
knowledgeable about these areas. E*TRADE’s policy, however, prohibits employees from giving legal or tax advice to a customer.
Certain employees may be permitted to provide financial advice to customers but only to the extent that any such employees are
specifically licensed to provide advice and have been authorized by E*TRADE to do so. Any questions relating to the provision of
financial advice to customers should be directed to the Compliance Department.

In all cases, customers should be advised to consult their own counsel for legal advice and to consult their own tax advisors for tax
guidance.

Advertising
Only the Marketing Department is authorized to arrange for advertising on E*TRADE’s behalf, and all marketing promotions and
advertisements of any kind must be approved by the Advertising Review team in the Compliance Department before any such
promotion is launched or any advertisement of any kind is published or broadcast in any way.

Charitable Contributions
Charitable contributions and giving are coordinated through the Corporate Contributions Committee. Employees are strictly
prohibited from committing E*TRADE funds for donation without express permission from the Corporate Contributions Committee.

Communications With the Media and Other Third Parties
E*TRADE values its relationships with the press and maintains routine, ongoing contact with key publications and broadcast outlets
around the world.

Because our corporate communications strategy is coordinated across E*TRADE, our corporate messaging must be closely managed
to ensure that it is concise and consistent, so only approved spokespersons, working in coordination with Corporate Communications,
are authorized to communicate with the media. Accordingly, all press or other media inquiries must be directed to Corporate
Communications, and employees are not to make contact with the press or media without consulting Corporate Communications.
This includes “letters to the editor” or comments to journalists about specific matters that relate to E*TRADE’s businesses and those
that identify you as an employee of E*TRADE. With respect to press inquiries about legal or regulatory matters or customer
complaints, employees and officers should follow

the procedures outlined in subsequent pages of this Code entitled “Litigation, Investigations, Inquiries and Complaints.”

Corporate Communications must authorize participation in personal profiles or stories about “lifestyle” in which E*TRADE is
referenced. If employees and officers wish to appear in articles regarding their activities outside E*TRADE (philanthropic activities
or hobbies, for example), they may do so. However, do not identify yourself as an employee of E*TRADE or use the name or
facilities of E*TRADE in any way without approval from Corporate Communications.

All press releases and other written communications, including all articles and commentary, mentioning E*TRADE must be approved
by Corporate Communications, the Legal Department and Advertising Review in the Compliance Department before being released
by E*TRADE, its customers, suppliers or any other organization.

Employees may not endorse the products or services of suppliers or customers on behalf of E*TRADE unless expressly authorized by
Corporate Communications and the Legal Department. This includes commenting in press articles (including in-house publications),
broadcasts (including internet, radio and television) and participating in testimonial advertising, promotional brochures or annual
reports. In addition, employees may not permit third parties to use E*TRADE’s name for endorsements of their products or services
without the approval of Corporate Communications, the Legal Department and Advertising Review within the Compliance
Department.

Internet Access and Social Media
E*TRADE restricts internet access to certain websites, including websites commonly referred to as social media for all employees;
but recognizes that certain employees may have a business reason to access restricted websites. If you require such access, then you
must enter a Move, Add or Change (MAC) Request through My Channel*E which includes a valid business reason for the access.
Prior to receiving access to a restricted website, the employee will be required to agree to additional levels of oversight and
supervision by Brokerage Compliance. Additional detail regarding E*TRADE’s policies and procedures applicable to internet access
and social media websites is available on My Channel*E at https://mychannele.corp.etradegrp.com/web/life/policy/blogging and
https://mychannele.corp.etradegrp.com/web/life/policy/use

In addition to these restrictions, and regardless of whether an employee has been granted access to a restricted website, employees
may not post entries or participate in any chat rooms or bulletin board discussions (whether in real-time or not) during your assigned
work hours or from any E*TRADE equipment (whether using remote access, an E*TRADE laptop, a smart phone or other device) at
any time. In addition, whether at work or outside of work, employees may not in any way purport to represent E*TRADE or opinions
of E*TRADE or identify yourself as an E*TRADE employee. In short, you may not in any way discuss E*TRADE (by name or
otherwise) in a blog posting, chat room, bulletin board or any similar electronic or other venue.

Outside Lawyers
Only the Legal Department has the authority to hire outside lawyers on behalf of E*TRADE. Accordingly, you cannot retain any
lawyer or law firm on behalf of E*TRADE without the express prior approval of the General Counsel, and you must obtain approval
from the Legal Department before speaking to any outside lawyer regarding E*TRADE.

Treatment of Privileged Communications and Documents

Treat all communications and documents seeking or receiving legal advice or preparing for litigation as confidential and subject to the
attorney-client privilege. This includes communications with, and documents created at the direction of, the Legal Department or
E*TRADE’s outside counsel. Communicate such information and documents within E*TRADE on a strict need-to-know basis and
only at the direction of the Legal Department. Do not disclose such information or documents to anyone outside E*TRADE unless
specifically directed to do so by E*TRADE’s assigned in-house legal counsel.

Documents that are prepared for, or at the direction of the Legal Department or appropriately retained outside counsel, should be
marked “Attorney-Client Communication, Privileged and Confidential.” Note, however, that merely marking documents “Privileged”
or “Confidential” does not provide legal protection from disclosure to a regulatory authority or a litigation adversary unless the
document satisfies the legal requirements for the relevant privilege. Similarly, the failure to write “Privileged” or “Confidential” does
not mean that a privilege is waived. Documents are not protected from disclosure to a regulator or in litigation merely because the
author copies someone in the Legal Department or because the author believes the documents are personal or private. Moreover,
some foreign jurisdictions do not recognize the legal concept of privilege. If you have any questions about whether a communication
or document is privileged, consult the Legal Department.

LITIGATION, INVESTIGATIONS, INQUIRIES AND COMPLAINTS
During litigation, an internal investigation, or a governmental, regulatory, administrative or SRO inquiry, audit or exam involving
E*TRADE, you may be asked to provide information, including documents, testimony or statements to the Legal and Compliance
Departments, E*TRADE’s outside counsel, or a governmental, regulatory or administrative authority or SRO. You may also be asked
to meet with these entities or persons. As a term and condition of your position with E*TRADE, you must consider such a request
your top priority, and you must cooperate fully with any such request, in coordination with the Legal and Compliance Departments,
and provide truthful information. You are not permitted to discuss any such request, or the substance of any discussions or requests,
with any third party, including any individual who may be the subject of an investigation or inquiry, without prior approval from the
Legal and Compliance Department. If you are contacted by an individual who may be a subject of an investigation and are requested
to provide information about the investigation, you must inform the individual that you are not permitted to disclose any information,
and you must contact the Legal and Compliance Departments to inform them of the contact. Failure to do so may subject you to
disciplinary action up to and including termination of your employment In addition, E*TRADE may provide information, including
documents, testimony or statements, concerning you or your activities at E*TRADE in connection with requests or inquiries by
governmental, regulatory or administrative authorities or SROs. E*TRADE strictly complies with all laws relating to the privacy of
your personal information and will ordinarily provide you notice prior to producing any such information. However, it may not be
appropriate or possible to provide such notice in every circumstance. E*TRADE retains the discretion to provide any information in
accordance with applicable law.

DEALINGS WITH E*TRADE
Protecting E*TRADE’s Assets
E*TRADE’s assets include, but are not limited to, its cash and securities, its premises, its technology, its proprietary and confidential
information, its legally privileged materials, its intellectual property (such as software, business plans, non-public financial
information, ideas for new products or services, and employee and customer lists), its brand and reputation. Specific policies with
respect to protecting these assets are in E*TRADE’s policy on “Handling Proprietary and Confidential Information,” which is
outlined in this Code, as well as the “Agreement Regarding Employment and Proprietary Information and Inventions” signed by
employees at the beginning of their employment. E*TRADE’s Confidential and Proprietary Information Policy can be found on My
Channel *E: https://mychannele.corp.etradegrp.com/web/life/policy/confidential.

In general, employees must use E*TRADE’s assets solely for the benefit of E*TRADE or its customers. In addition, employees must
safeguard these assets by adhering to E*TRADE’s security policies and procedures. Be alert to incidents that could lead to the loss,
misuse or theft of E*TRADE property. Report all such occurrences immediately to your direct supervisor and, as appropriate, to
Corporate Information Security and Fraud Management.

Use of E*TRADE’s Information and Communications Systems
E*TRADE maintains certain systems, including telephones, voicemail, electronic mail, computer networks, personal digital assistants
and remote access capabilities to further E*TRADE’s business objectives. Any systems to which employees are provided access are
to be used for E*TRADE business purposes, though incidental personal use is permitted. You must adhere to all E*TRADE policies
and procedures and any policies that your business unit or department may set governing such usage.

In addition, employees may not use E*TRADE’s systems to send, store, view or forward unlawful, offensive, harassing,
discriminatory or other inappropriate materials or messages or to engage in any outside business activity. Furthermore, employees
may not send, store or forward advertisements, solicitations or promotions not related to E*TRADE business except as expressly
authorized by E*TRADE. Also, employees are prohibited from using E*TRADE systems to engage in gambling, illegal activities or
any activities prohibited by E*TRADE policies.

Use sound judgment, business decorum and formality, when composing or forwarding any electronic communication. Generally,
information made available through My Channel*E is intended for internal use only. Please refer to the policies of your business unit
or department and contact the Legal or Compliance Departments with any questions on the use of this information.

All software transmitted over, downloaded onto or installed on E*TRADE’s systems must be done in compliance with applicable
laws and licenses and must be approved in advance by the E*TRADE Technology Department. Unapproved software is strictly
prohibited, including prevention of unauthorized or unlawful use and transmission of computer viruses. Contact the Legal Department
with any questions.

All electronic communications and internet access must be conducted in accordance with applicable E*TRADE policies and
procedures including but not limited to the policy governing internet access and social media websites as well as specific business
unit policies pertaining to electronic communications.

The policy pertaining to Internet Access and Social Media Websites is available on My Channel*E at
https://mychannele.corp.etradegrp.com/web/life/policy/blogging and https://mychannele.corp.etradegrp.com/web/life/policy/use

Monitoring of Communications and Files
E*TRADE reserves the right to monitor and review all written and electronic communications that employees send or receive at work
or using E*TRADE’s systems, including electronic mail and other electronic messages, voicemail, envelopes, packages or messages
delivered to E*TRADE, including items marked “Personal and Confidential.” Authorized persons may, as permitted by applicable
law, access employees’ desk or workspace files, electronic mail and other electronic messages, voicemail messages, internet usage
records, telephone records, word processing files and other information files (for example, to monitor compliance with applicable
laws, rules or regulations or E*TRADE policies). In addition, E*TRADE may, subject to applicable law, record and monitor
conversations on E*TRADE telephones, for example, to ensure the accuracy of transaction records, to comply with applicable laws
and regulations, to evaluate the quality of customer service or to check compliance with E*TRADE policies. Individual employees
are not permitted to record oral or telephonic communications.

Substance Abuse
E*TRADE seeks to maintain a safe work environment. Therefore, you may not sell, purchase, use, possess, or be under the influence
of any illegal substance while on E*TRADE’s premises or while conducting E*TRADE business. In addition, you must abide by all
E*TRADE policies concerning the use of alcohol at E*TRADE-related or sponsored events, whether or not on E*TRADE’s
premises. You should contact the Human Resources Department with any questions concerning such policies. The E*TRADE
Substance Abuse policy is posted on My Channel*E: https://mychannele.corp.etradegrp.com/web/life/policy/substance.

Non-Discrimination and Anti-Harassment Policy
E*TRADE promotes equal employment opportunity for all employees in connection with selection, training, development,
promotion, transfer, demotion, discipline, compensation and termination of employees. E*TRADE is committed to providing a
workplace that is free of sexual or other harassment.
Equal Employment Opportunities
It is the policy of E*TRADE to ensure equal employment opportunity without discrimination or harassment because of race, color,
national origin, religion, sex, age, disability, citizenship, marital status, sexual orientation, military status, belief, ethnic origin, gender
reassignment, pregnancy, nationality or any other characteristic protected by applicable law. E*TRADE is committed to a work
environment in which all individuals are treated with respect and dignity. Each individual should have the ability to work in a
professional atmosphere that promotes equal employment opportunities and prohibits discriminatory practices, including harassment.

E*TRADE expects that all relationships among persons in the workplace be businesslike and free of bias, prejudice and harassment.
E*TRADE’s Equal Employment Opportunities Policy is posted on My Channel*E:
https://mychannele.corp.etradegrp.com/web/life/policy/equal. If you have any questions regarding this policy, please contact the
Human Resources Department.

Discrimination and Harassment Are Against E*TRADE Policy and Are Illegal
E*TRADE prohibits, and will not tolerate, any discrimination or harassment, whether committed by any employee, temporary agency
employee, vendor, contractor or guest. In addition, U.S. law and the laws of most U.S. states and jurisdictions outside the U.S.
prohibit discrimination and harassment. Conduct prohibited by E*TRADE’s policy, as set forth herein, or under the law is
unacceptable in the workplace and in any work-related setting outside the workplace, such as during business trips, business meetings
and social events related to E*TRADE’s business. E*TRADE’s unlawful harassment policy is posted on My Channel*E:
https://mychannele.corp.etradegrp.com/web/life/policy/harassment.

Workplace Violence Is Prohibited
E*TRADE also is committed to providing its employees with a work environment that is free of threats, intimidation and violence.
E*TRADE expressly forbids any such behavior or the possession of firearms or any other weapons when conducting E*TRADE
business, whether on or off E*TRADE’s premises. Further guidance on determining what conduct or behavior is inappropriate and in
violation of E*TRADE policy, is available by contacting the Human Resources Department, Corporate Security and Fraud
Management or the Legal Department and on My Channel*E at the following link
https://mychannele.corp.etradegrp.com/web/life/policy/prohibited.

Retaliation Is Prohibited
E*TRADE prohibits retaliation against any individual who, in good faith, reports any violation of law, the Code or E*TRADE’s other
policies and procedures, including those prohibiting violence, discrimination, harassment, or concerns about affirmative action; or any
individual who participates in, or otherwise supports, an investigation of such reports. Anyone who retaliates or suggests others
retaliate against an individual under such circumstances will be subject to disciplinary action, up to and including termination of
employment. E*TRADE’s Unlawful Harassment Policy outlines the retaliation prohibition and is available at
https://mychannele.corp.etradegrp.com/web/life/policy/harassment.

Individuals Covered
E*TRADE’s anti-discrimination and anti-harassment policies apply to all applicants and employees and prohibit harassment,
discrimination, violence and retaliation whether engaged in by fellow employees, a supervisor or a manager. Persons not directly
connected to E*TRADE (for example, outside vendors, consultants, or customers) also are expected to comply with these policies in
all respects.

Reporting an Incident
You are strongly urged to report to your supervisor all incidents of discrimination, harassment, violence or retaliation, regardless of
the offender’s identity or position, so that effective remedial action can be taken as appropriate. If an incident involves your manager,
supervisor or any other member of management, you may make your report directly to the Human Resources Department, the Legal
Department or the Internal Audit Department. You may make a report orally or in writing.

In addition, you may report any potential violation or incident anonymously through ListenUp, an independent third-party service that
E*TRADE has retained. Instructions for submitting reports through ListenUp are available on My Channel*E or you may access the
site directly at www.listenupreports.com.

Investigation of Allegations
E*TRADE will promptly investigate all reported allegations of discrimination, harassment, violence or retaliation and will take
appropriate corrective action.

Consequences of Inappropriate Behavior

Misconduct, including harassment, discrimination, violence, retaliation, any act of moral turpitude or any other form of
unprofessional, illegal or criminal behavior, may subject you to disciplinary action by E*TRADE, up to and including immediate
termination. In addition, unlawful conduct may subject you to civil, and in some cases criminal, liability.

Handling Proprietary and Confidential Information
HandlingProprietary and Confidential information in the appropriate manner safeguards E*TRADE’s assets and ensures
compliance with regulations.
“Proprietary information” is E*TRADE information not known to the public that may have intrinsic value or that may provide
E*TRADE with a competitive advantage. Proprietary information also includes the information derived from public sources but
which becomes proprietary through E*TRADE’s aggregation or interpretation of that information. Proprietary information may be
present in various media and forms and includes information such as customer (for example, customer lists) and employee
information.

“Confidential information” is information that is not generally known to the public about E*TRADE, its customers, its counterparties
or other parties with which E*TRADE has a relationship. Use of Confidential information must adhere to applicable legal
requirements and E*TRADE policies and procedures. Like Proprietary information, Confidential information may be present in
various media and forms. The same information can be both confidential and proprietary.

Employees must use Proprietary or Confidential information solely to perform your duties for E*TRADE and not for their own
personal benefit. Confidential information learned from one customer cannot be used for any other purpose or for any other customer.

Safeguarding Materials Containing Proprietary or Confidential Information
Do not display, review or discuss Proprietary or Confidential information in public places. Proprietary or Confidential information in
physical form, including on electronic media such as a diskette, should not be left unattended unless it is secured behind a locked door
or in locked office furniture.

Information stored in computers, including smart phones, personal digital assistants, laptops and workstations must be protected by
passwords, encryption or other mechanisms that ensure only authorized individuals can access the information. Documents containing
Confidential or Proprietary information should never be left in a public place and, whenever possible, should be marked “E*TRADE
Confidential” and/or “E*TRADE Proprietary.”

Do not remove Proprietary or Confidential information from E*TRADE premises unless absolutely necessary to perform employee
job functions for E*TRADE. E*TRADE reserves the right to deny you permission to remove any Proprietary and Confidential
information from E*TRADE premises. If an

employee takes such information out of the office for business purposes, keep it on your person or in a secure place at all times and
return it promptly to E*TRADE premises.

Communicating Proprietary or Confidential Information
Exercise care when sending or discussing data containing Proprietary or Confidential information on voicemail, electronic mail or
other electronic messaging, mobile or cordless phones, fax machines or message services. Make sure you use correct electronic mail
addresses, telephone extension numbers, fax numbers and, when applicable, use project and code names.

Within E*TRADE, communicate Proprietary or Confidential information only to employees who have a legitimate business reason to
know the information and who have no responsibilities or duties that could give rise to a conflict of interest.

Do not disclose Proprietary or Confidential information to any person outside E*TRADE (including family members), or use it or
permit any third party to use it without first obtaining approval from Legal.

Disposal of Proprietary or Confidential Waste
When no longer of use, Proprietary or Confidential information must be disposed of in a manner that renders it unreadable and non-
reconstructable, using means and methods approved by E*TRADE (for example, approved shredders or confidential waste bins),
consistent with E*TRADE’s records management and information security policies, applicable law and any applicable contractual
obligations. Information contained on electronic storage media (for example, a zip cartridge) should be destroyed in a manner that
renders it unreadable and unrecoverable.

Proprietary or Confidential Information Concerning Securities
When Proprietary or Confidential information might affect the price of a security or other financial instrument, or the decision to buy
or sell securities or other financial instruments, the laws concerning insider trading also govern your responsibilities, regardless of
whether you are given specific instructions or reminders that particular information may be “inside” information. E*TRADE has
developed strict procedures to ensure compliance with the laws of each jurisdiction in which it does business. These procedures are
critical to the protection of the E*TRADE franchise and are described in E*TRADE’s policy on the “Treatment of Inside
Information,” which is outlined in a subsequent section of this Code. Remember that these restrictions apply to information relating to
the stock of third parties as well as to E*TRADE stock.

Ownership of Intellectual Property
E*TRADE owns all rights in any intellectual property developed by you during your employment that relate to E*TRADE’s business,
even if invented or otherwise developed outside E*TRADE premises and even if no E*TRADE equipment was used in the process.
For this purpose, E*TRADE’s intellectual property includes any invention or design (whether or not patentable or reduced to
practice) and all related patents and patent applications, any copyrightable work, any trademarks or service marks (and related
registrations or applications for registration) and any trade secrets. Some E*TRADE intellectual property is Proprietary information
that should be treated in accordance with the standards set forth in this Code.

Preventing Improper Use of Proprietary or Confidential Information

Employees should report violations or suspected violations of this policy or the policy of any specific business unit or department to
your supervisor, Information Technology, the Legal Department and, if appropriate, Corporate Information Security and Fraud
Management.

Treatment of Inside Information
Inside information is Proprietary or Confidential information about a securities issuer that is subject to special E*TRADE
policies.
POLICY ON THE TREATMENT OF INSIDE INFORMATION
Definition of Inside Information
“Inside information” (also called material non-public or price-sensitive information) is defined under federal, state and other
jurisdictional laws as non-public information about a securities issuer (e.g., a public company) that may have an impact on the price
of a security or other financial instrument or that a reasonable investor would be likely to consider important in making an investment
decision. Inside information may include but is not limited to, the following:
•

financial or business information (for example, non-public company earnings information or estimates, dividend increases or
decreases, liquidity problems or changed projections);
operating developments (for example, new product developments, changes in business operations or extraordinary management

developments or large increases or decreases in orders); or

proposed corporate transactions or reorganizations (for example, proposed or agreed mergers, acquisitions, divestitures, major
investments or restructurings).

•

Consider all facts and circumstances in determining whether an item is Inside information. Contact the Legal or Compliance
Department if you have any questions as to whether an item is, or may be, Inside information.

Prohibited Uses of Inside Information
As an E*TRADE employee, you may not trade, encourage others (including family, friends, co-workers or any others) to trade, or
recommend securities or other financial instruments based on Inside information. In most jurisdictions, securities laws require those
with Inside information about a securities issuer to refrain from disclosing such information to others and to desist from trading in or
recommending the purchase or sale of securities or other financial instruments based upon such information. It is a violation of
E*TRADE policy and, in certain instances, the law, for insiders to communicate Inside information to others, and it is

a violation of policy and the law for the person who receives a “tip” to disclose such information to others or to trade in or
recommend securities or other financial instruments based on the Inside information.

Guidelines for Information about E*TRADE
Publicly disclosed information about E*TRADE must be accurate and not misleading. Do not discuss any Inside information about
E*TRADE’s business outside E*TRADE. Refer all stockholder or securities analyst inquiries to the Investor Relations Department.

Handling Rumors
You may be violating the law if you trade based on a rumor. If you believe that a rumor or piece of unsubstantiated information may
have been circulated deliberately, potentially to influence the market for securities or other financial instruments of a publicly traded
company, you must report the situation promptly to the Legal, Risk Management and Compliance Departments. Do not trade based
on rumors or take any other action without the prior approval of the Legal and Compliance Departments.

Consequences of Misusing Inside Information
The misuse of Inside information may result in, among other things, regulatory inquiry, litigation, adverse publicity for E*TRADE
(and you) and disciplinary action by E*TRADE, up to and including termination of your employment. Misusing Inside information
may also end your career in the securities industry and result in civil and criminal penalties, including incarceration.

The Restricted List
E*TRADE maintains a list of trading restrictions for certain types of securities (the “Restricted List”). Employees and officers are not
permitted to trade in the securities (or other instruments) of issues on the Restricted List except in accordance with any guidelines set
forth on the Restricted List. Additional detail regarding the Restricted List is provided in Section 7 of this Code and on My
Channel*E at https://mychannele.corp.etradegrp.com/web/guest/departments/brokeragecompliance/restricted.

Outside Business Activities
Laws and regulations restrict your ability to become an officer, director or employee of a company not affiliated with E*TRADE
or to engage in certain outside business activities.
Before engaging in an outside business activity, all employees must obtain written approval in accordance with E*TRADE’s outside
business activities policies, which are posted on My Channel*E. Failure to obtain such approval may subject E*TRADE and you to
severe regulatory penalties and civil liability. Employees may also be subject to disciplinary action, up to and including termination of
employment.

Even if an outside activity has been approved, employees may not engage in that activity during working hours at E*TRADE nor use
E*TRADE facilities to further those outside activities except in accordance with E*TRADE’s policies. Employees’ participation in an
outside activity must not interfere with your duties at E*TRADE. Please note, that activities on behalf of regulators, regulatory
advisory groups and industry-related trade associations are not included in this prohibition. Additional information regarding outside
business activities is available on My Channel*E at
https://mychannele.corp.etradegrp.com/web/guest/departments/brokeragecompliance/surveillance/associate

Members of the E*TRADE Financial Corporation Board of Directors must adhere to the Corporate Governance Guidelines including
seeking approval of such committee to engage in certain business activities.

Outside Directorships, Industry-Related Organizations, Residential Boards and Charities
All employees are required to request approval for directorships or equivalent leadership positions in industry-related organizations,
such as trade associations. E*TRADE generally will not grant approval of outside business activities with another financial services
firm, including, but not limited to, broker-dealers, banks, mortgage dealers and non-affiliated investment advisers. You are required to
obtain approval to become a director or officer of a residential cooperative or condominium board or charitable organization.
Approval will depend upon the nature of your responsibilities at E*TRADE and whether you will be compensated by, or render
investment advice to, the board. Consult the Legal and Compliance Departments for further information.

Members of E*TRADE Financial Corporation’s Board of Directors must adhere to the Corporate Governance Guidelines and are
requested to advise the Corporate Secretary prior to accepting an appointment to a board of directors or advisory board of financial
institutions or other regulated organizations or companies.

Employee Trading
The Employee Trading Policy is designed to prevent legal, business and ethical conflicts and to guard against the misuse of
Proprietary or Confidential information.
All of your securities trading activities must strictly comply with all federal, state and other jurisdictional laws, rules and regulations
and must be in accordance with the very highest ethical standards. You must not engage in trading that is or may appear to be
improper. You may not engage in personal trading on a scale or of a kind that would distract you from your daily responsibilities. The
policy described below reflects these governing principles.

E*TRADE Employee Trading Policies and Practices
E*TRADE maintains a number of policies and procedures that govern employee trading in order to ensure compliance with numerous
laws, regulations and rules. Accordingly, employees are required to comply with these policies and procedures. In addition,
E*TRADE monitors employee trading activity and maintains records of such activities, as required by applicable law. E*TRADE’s
key policy in this area is the Employee Trading Policy, which applies to all E*TRADE employees and can be accessed on My
Channel*E at https://mychannele.corp.etradegrp.com/web/guest/departments/brokeragecompliance/surveillance/associate

The Employee Trading Policy addresses the trading policies of all E*TRADE business units; sets forth the types of accounts covered
by policy; details the requirement that employees maintain all trading accounts at E*TRADE; and also covers trading in E*TRADE
stock and restrictions on engaging in outside business activities. Employees are required to review, understand and adhere to the
restrictions and requirements set forth in that policy, as well as in this Code. Employees must also be familiar with and abide by any
trading policies applicable to your business unit or department because those policies may contain restrictions beyond those imposed
by this policy.

In addition, as set forth in the Employee Trading Policy, E*TRADE promotes wise investment and long-term financial planning for
both customers and employees. We strongly discourage employees from engaging in excessive or inappropriate trading that may
interfere with an employee’s job performance or conflict with principles of financial responsibility and long term investment
strategies. For a detailed description of the trading policy, please refer to the Employee Trading Policy found in the above-referenced
link.

In certain circumstances, as either an officer or employee of E*TRADE, you may be deemed to have a “fiduciary” duty that requires
you to conduct your personal trading affairs in a manner that first benefits

the investment objectives of customers. This conduct includes the timing of personal securities transactions. You should never
conduct personal trades at the same time or in advance of transactions in the same security when you know that similar transactions
are being planned by customers or their advisors. For additional information regarding this policy contact the Compliance
Department.

The Restricted List
The Restricted List, which is also discussed earlier in the Treatment of Outside Information section of this Code, is maintained by the
Compliance Department. The Restricted List is one of the tools E*TRADE uses to monitor and ensure that regulatory requirements
are met. Employees are not permitted to trade in the securities (or other instruments) of issues on the Restricted List except in
accordance with any guidelines set forth on the Restricted List. Consult the Compliance Department when questions arise or when
you believe an exception is warranted. If employees become aware of a violation, notify the Compliance Department as soon as
practicable, and in no event later than 24 hours following becoming aware of the violation. Corrective action should not be taken
without Compliance Department approval.

A company may be on the Restricted List for many reasons. Therefore, employees should not make any assumptions as to why an
issuer has been listed. Similarly, a company may not be on the Restricted List even though you (and others) may be in possession of
material non-public information about the company. The fact that a company is not on the Restricted List does not in any way convey
permission or approval to trade on Inside Information. The Restricted List regularly changes, so employees should consult the list
before trading.

The Restricted List constitutes Proprietary and Confidential information. Employees may not distribute the Restricted List, or any
portion thereof, outside E*TRADE. If employees have a joint account or an account in your name that is managed by another
pursuant to a power of attorney, it is the employee’s responsibility to ensure that no trades of securities on the Restricted List are
made in these accounts. It is always an employee’s responsibility to avoid trading on any Inside information. Additional detail
regarding the Restricted List is provided on My Channel*E at
https://mychannele.corp.etradegrp.com/web/guest/departments/brokeragecompliance/restricted.

Transactions in E*TRADE’s Securities
E*TRADE has specific rules, as set forth below, that govern your transactions in E*TRADE’s securities. You must follow these
specific rules:
•

The window period for transactions in E*TRADE’s securities generally begins or “opens” at the close of market on the second
business day following E*TRADE’s earnings announcement and ends at the close of market on the 15 of the last month (or, if
the 15 is not a market day, the preceding market day) of each fiscal quarter. However, circumstances relating to E*TRADE’s
operations or plans may cause E*TRADE to close the trading window at any time, with or without any prior notice.
Even during an open-window period, you may not transact in any of E*TRADE’s securities if you have Inside information

about E*TRADE, and any questions you have about whether a proposed transaction is appropriate must be resolved by seeking
guidance from the Legal and Compliance Departments.

You are not permitted to sell short or trade in derivatives involving any E*TRADE securities.

•

E*TRADE’s securities are non-marginable for employees (including officers) or board members.

Additional detail regarding E*TRADE policies and procedures applicable to trading is available on My Channel*E at
https://mychannele.corp.etradegrp.com/web/guest/departments/brokeragecompliance/surveillance/associate

ACKNOWLEDGEMENT

I hereby acknowledge that I have received a copy of the E*TRADE Code of Professional Conduct (the “Code”) and that I have
reviewed the contents of the Code and all policies referenced therein.

I understand that I am responsible for complying with all laws and regulations applicable to our business and all provisions of the
Code, as well as all other corporate policies and procedures, applicable to me as an employee, officer or director.

After reviewing the Code, if I realize there are any provisions with which I have not complied (for example, maintaining a brokerage
or trading account with an outside broker without prior approval or participating in an investment club or serving on the board of
directors of an outside entity without prior approval), I will promptly notify the appropriate E*TRADE department.

I understand that if I have any questions about the application of the Code in any situation, I should immediately seek guidance from
the Legal Department.

Dated:

Title:

Signature

Name Printed

STATEMENT OF COMPUTATION OF RATIO OF EARNINGS (LOSS) TO FIXED CHARGES
(in thousands, except ratio of earnings (loss) to fixed charges)

Exhibit 12.1

Fixed charges:

Interest expense
Amortization of debt issue expense
Estimated interest portion within rental expense
Preference securities dividend requirements of

consolidated subsidiaries
Total fixed charges

Earnings:
Income (loss) before income taxes and discontinued

operations less equity in income (loss) of investments

Fixed charges
Less:
Preference securities dividend requirements of

consolidated subsidiaries

Earnings (loss)
Ratio of earnings (loss) to fixed charges
Excess (deficiency) of earnings (loss) to fixed charges

2011

2010

2009

2008

2007

For the Year Ended December 31,

$488,641 $486,567 $

1,568
6,558

993

7,574

—

$496,767 $495,134

852,766 $ 1,557,654 $ 2,102,446
9,492
8,912

1,878
8,316

6,440
8,968

—

—
862,960 $ 1,573,062 $ 2,120,850

—

$187,089 $ (2,402) $(1,826,815) $(1,297,381) $(2,182,951)
862,960
496,767

1,573,062

2,120,850

495,134

—

—
$683,856 $492,732 $ (963,855) $
1.00

—
(62,101)
(0.03)
$187,089 $ (2,402) $(1,826,815) $(1,297,381) $(2,182,951)

—
275,681 $
0.18

(1.12)

1.38

—

The ratio of earnings (loss) to fixed charges is computed by dividing fixed charges into income (loss) before income taxes and

discontinued operations less equity in the income (loss) of investments plus fixed charges less the preference securities dividend
requirement of consolidated subsidiaries. Fixed charges include, as applicable, interest expense, amortization of debt issuance costs,
the estimated interest component of rent expense (calculated as one-third of net rent expense) and the preference securities dividend
requirement of consolidated subsidiaries.

E*TRADE Financial Corporation
Subsidiaries of Registrant

Company

Jurisdiction Name

Exhibit 21.1

Capitol View, LLC
Converging Arrows, Inc.
E Trade Nordic AB
SP Capital AB
E*TRADE Bank
E*TRADE Brokerage Services, Inc.
E*TRADE Capital Management, LLC
E*TRADE Capital Markets, LLC
E*TRADE Capital Trust XXVII
E*TRADE Capital Trust XXVIII
E*TRADE Capital Trust XXIX
E*TRADE Clearing LLC
E*TRADE Community Development Corporation
E*TRADE Europe Holdings B.V.
E*TRADE Europe Securities
E*TRADE Europe Services
E*TRADE Financial Corporate Services, Inc.
E*TRADE Financial Corporation Capital Trust V
E*TRADE Financial Corporation Capital Trust VI
E*TRADE Financial Corporation Capital Trust VII
E*TRADE Financial Corporation Capital Statutory Trust VIII
E*TRADE Financial Corporation IX
E*TRADE Financial Corporation Capital Trust X
E*TRADE FFX, LLC
E*TRADE Information Services, LLC
ETCM Holdings, Inc.
E*TRADE Insurance Services, Inc.
E*TRADE Master Trust
E*TRADE Mauritius Limited
E*TRADE Savings Bank
E*TRADE Securities Corporation
E*TRADE Securities Limited
E*TRADE Securities LLC
E-TRADE South Africa (Pty) Limited
E*TRADE UK (Holdings) Limited
E*TRADE UK Limited
E*TRADE UK Nominees Limited
ETB Capital Trust XI
ETB Capital Trust XII
ETB Capital Trust XIII
ETB Capital Trust XIV
ETB Capital Trust XV
ETB Capital Trust XVI
ETB Capital Trust XXV
ETB Capital Trust XXVI
ETB Holdings, Inc.
ETB Holdings, Inc. Capital Statutory Trust XXII
ETB Holdings, Inc. Capital Statutory Trust XXIII
ETB Holdings, Inc. Capital Trust XVII

Delaware
Delaware
Sweden
Sweden
Federal Charter
Delaware
Delaware
Illinois
Delaware
Delaware
Delaware
Delaware
Delaware
The Netherlands

Ireland
Ireland
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
California

Mauritius
Federal Charter
Philippines
United Kingdom
Delaware
South Africa
United Kingdom
United Kingdom
United Kingdom
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware

ETB Holdings, Inc. Capital Trust XVIII
ETB Holdings, Inc. Capital Trust XIX
ETB Holdings, Inc. Capital Trust XX
ETB Holdings, Inc. Capital Trust XXI
ETB Holdings, Inc. Capital Trust XXIV
ETCF Asset Funding Corporation
ETFC Capital Trust I
ETFC Capital Trust II
ETRADE Asia Services Limited
ETRADE Financial Information Services (Asia) Limited
ETRADE Securities (Hong Kong) Limited
ETRADE Securities Limited
E*TRADE Insight Management, Inc.
TIR (Holdings) Limited
E*TRADE United Bank
ET Canada Holdings Inc.

Delaware
Delaware
Delaware
Delaware
Delaware
Nevada
Delaware
Delaware
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Massachusetts
Cayman Islands
Federal Charter
Canada

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements of E*TRADE Financial Corporation of

our reports dated February 23, 2012, relating to the consolidated financial statements of E*TRADE Financial Corporation and
subsidiaries (which report expresses an unqualified opinion on the consolidated financial statements and includes an explanatory
paragraph relating to the adoption of accounting guidance, Recognition and Presentation of Other-Than-Temporary Impairments, on
April 1, 2009) and the effectiveness of E*TRADE Financial Corporation and subsidiaries’ internal control over financial reporting,
appearing in this Annual Report on Form 10-K of E*TRADE Financial Corporation for the year ended December 31, 2011.

Filed on Form S-3:

Registration

Statement Nos.:

333-104903, 333-41628, 333-124673, 333-129077, 333-130258, 333-136356, 333-150997, 333-156570, 333-
158636

Filed on Form S-4:

Registration

Statement Nos.: 333-91467, 333-62230, 333-117080, 333-129833

Filed on Form S-8:

Registration

Statement Nos.:

333-12503, 333-52631, 333-62333, 333-72149, 333-35068, 333-35074, 333-37892, 333-44608, 333-44610,
333-54904, 333-56002, 333-113558, 333-91534, 333-125351, 333-81702, 333-159653, 333-168939

/s/ Deloitte & Touche LLP

McLean, Virginia
February 23, 2012

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven J. Freiberg, certify that:
I have reviewed this Annual Report on Form 10-K of E*TRADE Financial Corporation;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be

designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting

which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the

registrant’s internal control over financial reporting.

Dated: February 23, 2012

E*TRADE Financial Corporation
(Registrant)

/s/ STEVEN J. FREIBERG
Steven J. Freiberg
Chief Executive Officer
(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Matthew J. Audette, certify that:
I have reviewed this Annual Report on Form 10-K of E*TRADE Financial Corporation;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting

which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the

registrant’s internal control over financial reporting.

Dated: February 23, 2012

E*TRADE Financial Corporation
(Registrant)

/s/ MATTHEW J. AUDETTE
Matthew J. Audette
Chief Financial Officer
(Principal Financial and Accounting Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with this Annual Report on Form 10-K of E*TRADE
Financial Corporation (the “Annual Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Steven J. Freiberg, the Chief Executive Officer and Matthew J. Audette, the Chief Financial Officer of E*TRADE Financial

Corporation, each certifies that, to the best of their knowledge:

the Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results
of operations of E*TRADE Financial Corporation.

Dated: February 23, 2012

/S/ STEVEN J. FREIBERG
Steven J. Freiberg
Chief Executive Officer
(Principal Executive Officer)

/S/ MATTHEW J. AUDETTE
Matthew J. Audette
Chief Financial Officer
(Principal Financial and Accounting Officer)