E TRADE Financial Corp. Annual Report 2012

FY2012 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, 2012
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

Act. Yes È No ‘

is a well-known seasoned issuer, as defined in Rule 405 of the Securities

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

Act). Yes ‘ No È

is a shell company (as defined in Rule 12b-2 of

the Exchange

‘
Accelerated filer
Smaller reporting company ‘

At June 30, 2012, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately
$1.7 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 22, 2013, there were 286,626,031 shares of common stock outstanding.

Certain portions of the definitive Proxy Statement related to the Company’s 2013 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, 2012
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer

1
1
1
2
2
4
5
5
5
8
9
21
21
22
27

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . .
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
110
Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 2—Operating Interest Income and Operating Interest Expense . . . . . . . . . . . . . . . . . . .
120
Note 3—Fair Value Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Note 4—Available-for-Sale and Held-to-Maturity Securities . . . . . . . . . . . . . . . . . . . . . . . . . 130
Note 5—Loans Receivable, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

28
30
32
32
36
49
55
60
65
69
79
87
92
98
101
101
102
104
105
106
107
108
110

Note 6—Accounting for Derivative Instruments and Hedging Activities . . . . . . . . . . . . . . .
Note 7—Property and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 8—Goodwill and Other Intangibles, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 9—Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 10—Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 11—Securities Sold Under Agreements to Repurchase and FHLB Advances and
Other Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 12—Corporate Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 13—Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 14—Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 15—Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 16—Earnings (Loss) per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 17—Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 18—Lease Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 19—Commitments, Contingencies and Other Regulatory Matters . . . . . . . . . . . . . . . .
Note 20—Segment Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 21—Condensed Financial Information (Parent Company Only) . . . . . . . . . . . . . . . . . .
Note 22—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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

144
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149
149

151
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160
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164
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171
173
175

175
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176

177
180

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 our 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 had approximately
3,000 employees at December 31, 2012. 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 clear and settle securities transactions
for customers of other broker-dealers, including E*TRADE Securities LLC; and

• G1 Execution Services, LLC (formerly known as E*TRADE Capital Markets, LLC) is a registered

broker-dealer and market maker.

A complete list of our subsidiaries at December 31, 2012 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 and financial
consultants. We also provide these services over the phone or in person through our 30 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 strategy is focused on:

•

Strengthening our overall financial and franchise position. We are focused on achieving a more
efficient distribution of capital between our regulated entities, improving capital ratios by reducing
risk, deleveraging the balance sheet and reducing costs, and enhancing our enterprise-wide risk
management culture and capabilities.

Improving our market position in our retail brokerage business. We plan to accelerate the growth in
our customer franchise and to continue enhancing the customer experience.

• Capitalizing on the value of our complementary brokerage 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 in retirement and investing. We believe growing our retirement and investing
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.

• Continuing to manage and de-risk the Bank. We are focused on optimizing the value of customer
deposits, while continuing to mitigate credit losses in our loan portfolio, and improving the Bank’s risk
profile. In addition, we do not plan to offer new banking products to customers, including mortgages.

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, brokerage account attrition
rate, customer assets, net new brokerage assets, brokerage related cash, corporate cash, E*TRADE Financial Tier
1 leverage and common ratios, E*TRADE Bank Tier 1 leverage 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,
forex 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, monitor real-time investment,
market and account information and transfer funds between accounts via iPhone®, iPad®, AndroidTM,
Windows® Phone or BlackBerry®;

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

•

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 77 international markets with American depositary receipts (“ADRs”), exchange-traded funds
(“ETFs”), and mutual funds, plus online equity trading in local currencies in Canada, France, Germany,
Hong Kong, Japan and the United Kingdom; 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.

Retirement and Investing Products and Services

•

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

retirement planning resources including our easy-to-use Retirement planning 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 evaluations and personalized plans;

• OneStop Rollover, a simplified, online rollover program that enables investors to invest their 401(k)

savings from a previous employer into a professionally-managed portfolio;

•

access to all ETFs sold, including over 80 commission-free ETFs from leading independent providers,
and over 7,700 non-proprietary mutual funds;

• 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,

comprehensive Online Portfolio Advisor to help customers identify the right asset allocation and
provide a range of solutions including a one-time investment portfolio or a managed investment
account;

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

comprehensive Investor Education Center that provides investing and trading resources 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 OnlineTM platform facilitates the management of employee stock 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 retail products and services. Equity Edge OnlineTM was rated #1 in overall
satisfaction and loyalty by Group Five, an independent consulting and research firm, in its 2012 Stock Plan
Administration Study Industry Report.

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 statistical information regarding products and services, see Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations (“MD&A”). Three years of segment financial
performance and data can be found in the MD&A and in Note 20—Segment Information of Item 8. Financial
Statements and Supplementary Data.

SALES AND CUSTOMER SERVICE

We believe providing superior sales and customer service is fundamental to our business. 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 30 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 and develop plans to help them achieve their
investment goals. Customers can also contact our financial consultants via phone or e-mail if they
cannot visit the branches.

• 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 and/or engage in Live Chat with 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 invest in these critical platforms in
2012, 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 E*TRADE 360, enhanced mobile offerings across new devices and upgrades to our trading
platforms.

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. 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 Board of Governors of the Federal Reserve System (“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 requires financial institutions to develop anti-
money laundering (“AML”) programs to assist in the prevention and detection of money laundering. In order to
comply with the BSA/USA PATRIOT Act, we have an AML department that is responsible for developing and
implementing our enterprise-wide programs for compliance with the various anti-money laundering and counter-
terrorist financing laws and regulations. Our brokerage and banking entities are also subject to U.S. sanctions
laws administered by the Office of Foreign Assets Control and we have policies and procedures in place to
comply with these laws.

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 “opt out” 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
including lending practices, safeguarding deposits,
regulation covers all aspects of the banking business,
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. In October 2012, the FDIC amended its 2011 rule to revise the definition of certain higher risk
assets used to calculate the quarterly insurance assessment beginning on April 1, 2013. The FDIC will continue
to assess the changes to the assessment rates at least annually.

Financial Regulatory Reform Legislation and Basel III Framework

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 former primary federal bank regulator, the Office of Thrift Supervision (“OTS”), was abolished in July
2011 and its functions and personnel distributed among the OCC, the FDIC and Federal Reserve. 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, 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 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 fully 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 regulatory capital requirements. These requirements are expected to become effective

within the next three years. We believe these capital ratios are an important measure of capital strength and
accordingly we manage our capital against the current capital ratios that apply to bank holding companies in
preparation for the application of these requirements. 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 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. The Basel II framework was finalized by U.S. banking agencies in 2007; however, E*TRADE Bank did
not meet the threshold requirements for Basel II and, therefore, has never been subject to the requirements of
Basel II. 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 framework. The final Basel III framework was released in December 2010
and is subject to individual adoption by member nations, including the U.S. The Basel III framework is intended
to strengthen the prudential standards for large and internationally active banks; however, it may be applied by
U.S. regulators to other banking institutions.

In June 2012, the U.S. Federal banking agencies published notices of proposed rulemaking for comment
related to the implementation of the Basel III framework for the calculation and components of a banking
organization’s regulatory capital and a U.S. version of the international standardized approach for calculating a
banking organization’s risk-weighted assets. In November 2012, the banking agencies announced a delay in the
implementation of Basel III in the U.S. and have not yet issued final Basel III rules. We believe the most relevant
elements of the proposal to us relate to the proposed risk-weighting of mortgage loans and margin receivables in
addition to the inclusion in the calculation of Common Tier 1 capital of unrealized gains (losses) on all available-
for-sale debt securities. Under the current proposal, we do not believe the incorporation of these elements have a
significant impact on our current capital ratios. However, the final impact of the Basel III capital standards on
regulatory requirements will remain uncertain until the final rules for implementing Basel III are adopted for U.S.
institutions. We will continue to monitor the ongoing rule-making and comment process to assess both the timing
and the impact of the Dodd-Frank Act and Basel III capital standards on our business.

On October 9, 2012, the Federal Reserve adopted final regulations implementing the requirement for certain
Federal Reserve-regulated savings and loan holding companies including the Company to conduct company-run
stress tests on an annual basis. Under the Federal Reserve’s stress test regulations, we will be required to utilize
stress-testing methodologies providing for results under at least three different sets of conditions, including
baseline, adverse, and severely adverse conditions. The final regulations will apply to the Company in the fall of
the calendar year after it becomes subject to minimum capital requirements, a period which has not yet been
specified. We conducted a company-run stress test for the Company, which we believe is consistent with the
Federal Reserve’s methodologies, and provided the results to the Federal Reserve with the submission of the
long-term strategic and capital plan.

Also on October 9, 2012, the OCC adopted final regulations implementing the requirement for national
banks or federal savings associations with over $10 billion in average total consolidated assets, including
E*TRADE Bank to conduct company-run stress tests on an annual basis. Under the OCC’s stress test regulations,
E*TRADE Bank also will be required to utilize stress-testing methodologies providing for results under at least
three different sets of conditions,
including baseline, adverse and severely adverse scenarios. The final
its first stress test using financial statement data as of
regulations require E*TRADE Bank to conduct
September 30, 2013, and it will be required to report results to the OCC on or before March 31, 2014. We
conducted a company-run stress test for E*TRADE Bank, which we believe is consistent with the OCC’s
methodologies, and provided the results to the OCC with the submission of the long-term strategic and capital
plan.

For additional regulatory information on our brokerage and banking regulations, see Note 17—Regulatory

Requirements of Item 8. Financial Statements and Supplementary Data.

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 $112.6 million and $28.5 million for the years ended December 31, 2012 and
2010, respectively. The loss in 2010 was due primarily to the credit losses in the loan portfolio and, in 2012, the
loss was due primarily to a $256.9 million loss on the early extinguishment of all the 12 1⁄ 2% springing lien notes
due November 2017 (“12 1⁄ 2% Springing lien notes”) and 7 7⁄ 8% senior notes due December 2015 (“7 7⁄ 8%
Notes”). 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
2013. 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 continued net loss position.

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

At December 31, 2012, the principal balance of our home equity loan portfolio was $4.2 billion and the
allowance for loan losses for this portfolio was $257.3 million. At December 31, 2012, the principal balance of
our one- to four-family loan portfolio was $5.4 billion and the allowance for loan losses for this portfolio was
$183.9 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 addition, 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.
During the normal course of conducting examinations, our banking regulators, the OCC and Federal Reserve,
continue to review our business and practices. This process is dynamic and ongoing and we cannot be certain that
additional changes or actions will not result from their continuing review. We may be required under such
circumstances to further increase the 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 the home equity and one- to four-family loan portfolios was $4.0 billion and
$5.3 billion, respectively, at December 31, 2012. The 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 $3.6 billion and
$4.6 billion, respectively, at December 31, 2012, in accordance with the fair value measurements accounting
guidance, as disclosed in Note 3—Fair Value Disclosures of Item 8. Financial Statements and Supplementary
Data. The fair value of the 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 the
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, 2012:

•

approximately 50% and 60% of the one- to four-family and home equity loan portfolios, respectively,
had a current loan-to-value (“LTV”)/combined loan-to-value (“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 39% and 37% 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 114% as of
December 31, 2012. 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 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
five to ten years. At December 31, 2012, 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 80% 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 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.

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. From time to time we have discovered that these vendors and servicers

have provided incomplete or untimely information to us about our loan portfolio. For example, provision for loan
losses increased in the third quarter of 2012 in connection with our discovery that one of our third party loan
servicers had not been reporting historical bankruptcy data to us on a timely basis and as a result, we recorded
additional charge-offs in the third quarter of 2012. In connection with this discovery, we implemented an
enhanced procedure around all servicer reporting to corroborate bankruptcy reporting with independent third
party data.

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

At December 31, 2012, we held $260.1 million in amortized cost of non-agency collateralized mortgage
obligations (“CMO”) on our consolidated balance sheet. We incurred net impairment charges of $16.9 million
during 2012, 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 could be lower and our
losses could be greater than we have experienced.

We have a large amount of corporate debt.

We have issued a substantial amount of corporate debt, with restrictive financial and other covenants and
our expected annual interest cash outlay is approximately $110 million. Our ratio of corporate debt to equity
(expressed as a percentage) was 36% at December 31, 2012. 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
leverage may place us at a competitive
corporate needs is significantly limited; and 3) our substantial
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.

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

We submitted an initial long-term strategic and capital plan to the OCC and Federal Reserve during the
second quarter of 2012. The plan included: our five-year business strategy; forecasts of our business results and
capital ratios; capital distribution plans in current and adverse operating conditions; and internally developed
stress tests. During the third quarter of 2012, we received initial feedback from our regulators on this plan and we
believe that key elements of this plan, specifically reducing risk, deleveraging the balance sheet and the
development of an enterprise risk management function, are critical. We submitted an updated long-term
strategic and capital plan to the OCC and Federal Reserve in February 2013, which included the key elements
outlined in the initial plan as well as the progress made during 2012 on those key elements. We believe that our
targets for capital levels at E*TRADE Bank and corresponding distributions of capital from E*TRADE Bank and
its subsidiaries to the parent company will be achievable over time. We plan to continue an active and ongoing
dialogue with our regulators to ensure our execution of the plan is consistent with their expectations.

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. The class action has been resolved by a settlement that was approved by the
Court. The shareholder derivative action is subject to a settlement agreement that is pending Court approval.

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.

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. We expect enterprise net
interest spread will continue to compress in 2013; however, enterprise net interest spread may further fluctuate
based on the size and mix of the balance sheet, as well as the impact from the level of interest rates. 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 participate in 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 businesses we have acquired in the past were primarily customer accounts.
In future acquisitions, our retention of customers’ assets may be impacted by our ability to successfully 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, which 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 $1,416.2 million as of December 31, 2012. We did not establish a
valuation allowance against our federal net deferred tax assets as of December 31, 2012 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 federal 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 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 and E*TRADE Savings 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 entered into with the Federal
Reserve and that E*TRADE Bank entered into with the OCC) 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.

The Federal Reserve has primary jurisdiction for the supervision and regulation of savings and loan holding
companies, including the Company; and the OCC has primary supervision and regulation of federal savings
associations, such as the Company’s two thrift subsidiaries. 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 it. 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. 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 created 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 1
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 OCC and the Federal Reserve have
issued final regulations that will require E*TRADE Bank and will ultimately also require the parent company to
conduct capital adequacy stress tests on their operations. E*TRADE Bank will be required to disclose a summary
of these stress test results to the OCC on or before March 31, 2014 and the Company will ultimately also be
required to disclose a summary of its stress test results, although the date remains undetermined.

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 fully known for months or years. It is difficult to predict

at this time all of the 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 function. The failure to establish and
enforce reasonable compliance procedures, even if unintentional, could subject us to significant losses or
disciplinary or other actions.

The Company recently completed a review of order handling practices and pricing for order flow between
E*TRADE Securities LLC and G1 Execution Services, LLC (G1X). The purpose of the review was to examine
whether E*TRADE Securities LLC was providing “best execution” of customer orders as well as otherwise
complying with applicable securities laws and dealing appropriately with its market making affiliate under
applicable federal bank regulatory standards. The review was conducted by separate firms of outside broker-
dealer and bank regulatory counsel. The firms’ reports identified shortcomings in the Company’s historical
methods of measuring best execution quality and suggested additions and changes to the Company’s standards,
processes and procedures for measuring execution quality and for monitoring and testing transactions between
the Bank and non-Bank affiliates to ensure compliance with relevant regulations. The Company is in the process
of implementing the recommended changes, and expects to complete the process in the near future. Banking
regulators and federal securities regulators were regularly updated during the course of the review. The
Company’s regulators may initiate investigations into its historical practices which could subject it to monetary
penalties and cease-and-desist orders, which could also prompt claims by customers of E*TRADE Securities
LLC. Any of these actions could materially and adversely affect the Company’s market making and trade
execution businesses.

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 1 capital to risk-weighted assets and of Tier 1 leverage. To satisfy
the capital requirements for a “well capitalized” financial institution, E*TRADE Bank must maintain higher total
and Tier 1 capital to risk-weighted assets and Tier 1 leverage 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.

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,

to extensive regulation of

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 place

limitations on 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 under the terms of our outstanding
convertible notes and 2.0 to 1.0 under the terms of our other outstanding series of notes. As of December 31,
2012, our Consolidated Fixed Charge Coverage Ratio was (0.1) 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 certain of 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 6 3⁄4% senior notes due May 2016, 6% senior notes due November 2017 and 6 3⁄ 8% senior notes due
November 2019, 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, 2010 through December 31, 2012, the price per share of our common stock ranged from a
low of $7.08 to a high of $19.90. 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 19—Commitments,
Contingencies and Other Regulatory Matters of Item 8. Financial Statements and Supplementary Data, we were 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, regulatory approval and 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, 2012 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
Jersey City, New Jersey
Arlington, Virginia
Menlo Park, California
Sandy, Utah
New York, New York
Chicago, Illinois

Approximate Square Footage

254,000
107,000
102,000
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 30 E*TRADE branches,
ranging in space from approximately 2,500 to 8,000 square feet. We believe our facilities space is adequate to
meet our needs in 2013.

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. The Company petitioned the Supreme Court of California for review of the Court of Appeal
decision. On December 16, 2010, the California Supreme Court denied the Company’s petition for review and
remanded for further proceedings to the trial court. On September 20, 2011, the trial court granted limited
discovery at a conference on November 4, 2011. The testimonial phase of the third trial in this matter
commenced on February 21 and 22, 2012 and concluded on June 12, 2012. The parties await decision on whether
there will be a second phase of this bench trial. 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 contended, 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. The parties entered into a Stipulation of Settlement on May 17, 2012, which was submitted to the
Court for approval. The settlement was approved by the Court and the class was certified by a final judgment and
order of dismissal dated October 22, 2012. Under the terms of the settlement, the Company and its insurance
carriers paid $79.0 million in return for full releases. Approximately $11.0 million of the total settlement figure
was paid by the Company, which was expensed in the year ended December 31, 2011. As of January 14, 2013,
all appeals and requests for attorneys’ fees have been resolved and the settlement is final.

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 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 the Company’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. Prior to any hearings on the
appeal, the lead plaintiffs in this action accepted the terms of the Purchase Offer in connection with the North
American Securities Administrators Association (“NASAA”) settlement (see Regulatory Matters below), and this
class action was dismissed with prejudice in February 2012.

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 moved for exclusion from the settlement class in
Freudenberg. The Court granted that relief on October 11, 2012 and ordered the parties to provide a status update
within 30 of final approval of that order. Tate and Avakian filed an amended complaint on January 23, 2013,
adding an additional claim under California law. The Company will continue to defend itself vigorously in this
matter.

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 certain corporate governance
procedures and various forms of injunctive relief. The parties agreed to settle this action and a Stipulation of
Settlement was signed on October 2, 2012, which included an agreement to implement or maintain certain
corporate governance procedures. The parties did not reach an agreement on the issue of plaintiffs’ attorneys’
fees, however. Plaintiffs submitted the Stipulation of Settlement
to the Court on November 2, 2012, in
connection with an unopposed motion for preliminary approval of the settlement. The parties are awaiting the
scheduling of a hearing for preliminary approval of the settlement. The Stipulation of Settlement contemplates
that the issue of plaintiffs’ attorneys’ fees will be litigated in parallel with, but have no bearing on, final approval
of the settlement. The Company will continue to defend itself vigorously in this matter.

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 LLC’s
belief that disciplinary action is not warranted. On June 27, 2012, FINRA advised E*TRADE Securities LLC that
it would not recommend disciplinary action in connection with this matter.

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, 2012, 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 the Company’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. On March 27, 2012, the Court granted the Company’s motion for summary judgement and
granted the Company’s motion to dismiss. However,
the Court allowed plaintiffs to seek a new class
representative and permitted limited discovery on a narrow issue as to when the fee increase was posted on the
Company’s website in 2005. On September 10, 2012, plaintiffs voluntarily withdrew the action with prejudice.
The Company paid no consideration for this dismissal, which was endorsed by the Court. There have been no
appeals of the Court’s order dismissing the action. This action is now closed.

Securities LLC offered 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 which E*TRADE
Securities LLC 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 offered to purchase (or offered 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 had 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, 2012, no
existing Colorado customers held any auction rate securities, and the total amount of auction rate securities held
by E*TRADE Securities LLC customers nationwide was approximately $2.6 million. The Company recorded an
estimated liability of $48 million during the year ended December 31, 2011. During the second quarter of 2012,
the Company recorded a benefit of $10.2 million related to a reduction in the estimated liability as a result of the
completion of the Purchase Offer which expired on May 15, 2012. The estimated liability 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 estimated liability also included penalties and other
estimated settlement costs. The agreement included the resolution of all material individual auction rate securities
arbitrations and litigations.

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, 2012, no existing South
Carolina customers held any auction rate securities.

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 and multiple other unaffiliated financial services firms. Plaintiff
contends that the defendants engaged in patent infringement under federal law. Plaintiff seeks unspecified
damages and an injunction against future infringements, plus royalties, costs, interest and attorneys’ fees. On
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. On March 28, 2012, a change of venue was granted and the case has been transferred to
the United States District Court for the Southern District of New York. The Company filed its answer and
counterclaim on June 13, 2012 and plaintiff has moved to dismiss the counterclaim. The Company filed a motion
for summary judgment. Plaintiffs sought to change venue back to the Eastern District of Texas on the theory that
litigation. On
this case is one of several matters that should be consolidated in a single multi-district
December 12, 2012, the Multidistrict Litigation Panel denied the transfer of this action to Texas. The Company
will defend itself vigorously in this matter.

Several cases have been filed nationwide involving the April 2007 leveraged buyout (“LBO”) of the Tribune
Company (“Tribune”) by Sam Zell, and the subsequent bankruptcy of Tribune. In William Niese et al. v. A.G.
Edwards et al., in Superior Court of Delaware, New Castle County, former Tribune employees and retirees
claimed that Tribune was actually insolvent at the time of the LBO and that the LBO constituted a fraudulent
transaction that depleted the plaintiffs’ retirement plans, rendering them worthless. E*TRADE Clearing LLC,
along with numerous other financial institutions, is a named defendant in this case, 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. G1 Execution Services, LLC (formerly known as E*TRADE Capital
Markets, LLC), along with numerous other financial institutions, is a named defendant in this case. In Deutsche
Bank et al. v. Ohlson et al., filed in the U.S. District Court for the Northern District of Illinois, noteholders of
Tribune asserted claims of constructive fraud and G1 Execution Services, LLC is a named defendant in this case.
In EGI-TRB LLC et al. v. ABN-AMRO et al., filed in the Circuit Court of Cook County Illinois, creditors of
Tribune assert fraudulent conveyance claims against multiple shareholder defendants and E*TRADE Clearing
LLC is a named defendant in this case. 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 Court has set a motion schedule for omnibus motion to dismiss to
be heard on March 1, 2013. Discovery remains stayed during this period. 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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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:

2012:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

2011:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$11.50
$11.16
$10.09
$ 9.54

$18.13
$16.83
$16.66
$11.69

$ 7.77
$ 7.39
$ 7.08
$ 7.70

$14.60
$13.23
$ 9.07
$ 7.42

The closing sale price of our common stock as reported on the NASDAQ on February 22, 2013 was $10.84

per share. At that date, there were 1,459 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

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, restricted stock awards and restricted stock units to officers, directors and certain 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 of the grant. 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.

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, 2012, 9.8 million shares were available for grant under the 2005 Plan.

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, the S&P Composite 1500 Diversified Funds, and the Dow Jones US Financials
Index during the period from December 31, 2007 through December 31, 2012.

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

$120

$100

$80

$60

$40

$20

12/07

12/08

12/09

12/10

12/11

12/12

E*Trade Financial Corporation

S&P 500

S&P Composite 1500 Diversified Funds

Dow Jones US Financials Index

*$100 invested on 12/31/07 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 Funds
Dow Jones US Financials Index

12/07

12/08

12/09

12/10

12/11

12/12

100.00
100.00
100.00
100.00

32.39
63.00
46.03
49.60

49.58
79.67
61.52
58.09

45.07
91.67
65.22
65.48

22.42
93.61
46.83
57.07

25.21
108.59
65.17
72.39

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

2012

2011

2010

2009

2008

2012 vs. 2011

$ 1,085.1
$ 1,899.5
$ 354.6

$ 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

(11)%
(7)%
(20)%

$ (112.6) $
$ (112.6) $

156.7
156.7

$
$

(0.39) $

0.59

(0.39) $
(0.39) $

0.54
0.59

(0.39) $

0.54

$
$

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

(0.13) $ (11.85) $ (15.88)

(0.13) $ (11.85) $ (15.88)
(0.13) $ (11.85) $ (10.04)

(0.13) $ (11.85) $ (10.04)

*
*

basic

285,748

267,291

211,302

109,544

50,986

Weighted average shares—

diluted

285,748

289,822

211,302

109,544

50,986

(1)%

*
(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

2012

2011

2010

2009

2008

2012 vs. 2011

December 31,

Variance

(14)%
57%
20%
(18)%
(1)%
7%

19%
(1)%
(0)%

$13,443.0
$ 9,539.9
$ 5,804.0
$10,098.7
$47,386.7
$28,392.5

$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

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

$ 1,722.3
$
42.7
$ 4,904.5

$ 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

$ 2,750.5
$
—
$ 2,591.5

Customer Activity Metrics:(1)

DARTs
Average commission per trade
Margin receivables (dollars in

billions)

End of period brokerage accounts
Net new brokerage accounts
Brokerage account attrition rate
Customer assets (dollars in billions) $
Net new brokerage assets (dollars in

billions)

Brokerage related cash (dollars in

billions)

Company Metrics:

Corporate cash (dollars in millions)
E*TRADE Financial Tier 1 leverage

ratio

E*TRADE Financial Tier 1

common ratio

E*TRADE Bank Tier 1 leverage

ratio(2)

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)

As of or For the Year Ended December 31,

Variance

2012

2011

2010

2009

2008

2012 vs. 2011

138,112

157,475

150,532

179,183

11.01 $

11.21 $

11.33 $

169,075
10.98

(12)%
0%

5.8 $

4.8 $

5.1 $

3.7 $

2,903,191
120,179

2,783,012
98,701

2,684,311
54,232

2,630,079
114,273

2.7
2,515,806
142,541

9.0%
201.2 $

10.3%
172.4 $

12.2%
176.2 $

13.2%
150.5 $

16.9%
110.1

10.4 $

9.7 $

8.1 $

7.2 $

3.9

33.9 $

27.7 $

24.5 $

20.4 $

15.8

21%
4%
22%
*
17%

22%

407.6 $

484.4 $

470.5 $

393.2 $

434.9

(16)%

5.5%

10.3%

8.7%

5.7%

9.4%

7.8%

3.6%

4.8%

7.3%

N/A

(0.2)%

0.9%

6.7%

6.3%

0.9%

342.2 $

467.1 $

589.4 $

804.5 $

1,035.1

(27)%

480.7 $
2.39%

822.8 $
2.79%

1,031.2 $
2.91%

1,182.7 $
2.72%

1,080.6

(42)%
2.52% (0.40)%

44.3 $
2,988

42.7 $
3,240

41.1 $
2,962

44.5 $
3,084

46.9
3,249

4%
(8)%

Percentage not meaningful.

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

(2)

market trading for the years ended December 31, 2009 and 2008.
The Company transitioned from reporting under the OTS reporting requirements to reporting under the OCC reporting requirements in the first
quarter of 2012. The Tier 1 leverage ratio is the OCC Tier 1 leverage ratio as of December 31, 2012 and the OTS Tier 1 capital ratio at
December 31, 2011, 2010, 2009 and 2008. The OTS Tier 1 capital ratio and OCC Tier 1 leverage ratio are both calculated in the same manner using
adjusted total assets.

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 strategy is focused on:

•

Improving our market position in our retail brokerage business. We plan to accelerate the growth in
our customer franchise and to continue enhancing the customer experience.

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, our

ability to:

•

have continued success in the acquisition, growth and retention of brokerage customers;

generate meaningful growth in the retirement and investing customer group;

strengthen our risk management capabilities;

reduce credit costs and the size of the balance sheet;

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

assess and manage interest rate risk; and

have 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:

As of or For the
Year Ended December 31,

Variance

2012

2011

2010

2012 vs. 2011

Customer Activity Metrics:

DARTs
Average commission per trade
Margin receivables (dollars in billions)
End of period brokerage accounts
Net new brokerage accounts
Brokerage account attrition rate
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 1 leverage ratio
E*TRADE Financial Tier 1 common ratio
E*TRADE Bank Tier 1 leverage ratio(1)
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)

$
$

138,112
11.01
5.8
2,903,191
120,179

$
$

157,475
11.01
4.8
2,783,012
98,701

$
$

150,532
11.21
5.1
2,684,311
54,232

12.2%
176.2
8.1
24.5

470.5

3.6%
4.8%
7.3%

9.0%

201.2
10.4
33.9

407.6

5.5%
10.3%
8.7%

342.2
480.7
2.39%

44.3

$
$
$

$
$

10.3%
172.4
9.7
27.7

484.4

5.7%
9.4%
7.8%

467.1
822.8
2.79%

42.7

$
$
$

$
$

$
$
$

$
$

589.4
1,031.2

2.91%

(27)%
(42)%
(0.40)%

41.1

(12)%
0%
21%
4%
22%
*
17%
7%
22%

(16)%
(0.2)%
0.9%
0.9%

*
(1)

Percentage not meaningful.
The Company transitioned from reporting under the OTS reporting requirements to reporting under the OCC reporting requirements in
the first quarter of 2012. The Tier 1 leverage ratio is the OCC Tier 1 leverage ratio as of December 31, 2012 and the OTS Tier 1 capital
ratio at December 31, 2011 and 2010. The OTS Tier 1 capital ratio and OCC Tier 1 leverage ratio are both calculated in the same manner
using adjusted total assets.

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, net new brokerage accounts and brokerage account attrition rate are
indicators of our ability to attract and retain brokerage customers. The brokerage account attrition rate
is calculated by dividing attriting brokerage accounts, which are gross new brokerage accounts less net
new brokerage accounts, by total brokerage accounts at the previous period end.

• 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.

• Brokerage related cash is an indicator of the level of engagement with our brokerage customers and is 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 1 leverage ratio is Tier 1 capital divided by average total assets for leverage
capital purposes for the parent company. E*TRADE Financial Tier 1 common ratio is Tier 1 capital
less elements of Tier 1 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 1 leverage and Tier
1 common ratios are non-GAAP measures as the parent company is not yet held to these regulatory
capital requirements and are indications of E*TRADE Financial’s capital adequacy. See Liquidity and
Capital Resources for a reconciliation of these non-GAAP measures to the comparable GAAP
measures.

• E*TRADE Bank Tier 1 leverage ratio is Tier 1 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 2012

Extinguishment of High Cost Senior Notes

• During the fourth quarter, we issued an aggregate principal amount of $505 million of 6% senior notes
due November 2017 and $800 million of 6 3⁄ 8% senior notes due November 2019. We used the
proceeds to redeem all of the 12 1⁄ 2% Springing lien notes due November 2017 and 7 7⁄ 8% senior notes
due December 2015, including paying the associated redemption premiums, accrued interest and
related fees and expenses. This transaction will result in an annual after-tax savings of approximately
$60 million.

Submission of Our Strategic and Capital Plan

• We submitted a long-term strategic and capital plan to the OCC and Federal Reserve, which included:
our five-year business strategy; forecasts of our business results and capital ratios; capital distribution
plans in current and adverse operating conditions; and internally developed stress tests.

Enhancements to Our Trading and Investing Products and Services

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

available to all customers including real-time streaming quotes to all customers;

• We launched our redesigned public website featuring simplified navigation, personalization based on

objectives and experience levels and enhanced content;

• We launched OneStop Rollover, an online program to simplify the process for individuals to invest

their 401(k) savings from a previous employer into a professionally-managed portfolio;

• We introduced E*TRADE FX, a no-fee platform enabling customers to trade 56 currency pairs with
the additional support of advanced charting, news and analysis, access to Forex Trading Specialists,
and paper trading;

• We redesigned our Bond Resource Center, which offers streamlined access to news, education,
intuitive screeners to select individual bonds, and tools to help customers build out their fixed income
portfolio;

• We enhanced our E*TRADE Pro platform by adding new tools including a trading ladder, advanced
charting capabilities, redesigned strategy scanning tools and other changes to simplify the overall user
experience for active traders;

• We launched voice recognition on E*TRADE Mobile for the iPhone®, which allows customers to
verbally prompt stock quotes, news and options chains, navigate to their portfolios and launch a stock
order ticket;

• We launched a voluntary program that enables customers to donate small or unwanted shareholdings to

a charitable organization, ShareGift USA;

• We continued to offer investor education comprising seminars, webinars and videos, both live and on-

demand;

• We launched a number of online resources to assist clients with investing including the investing
insights center with thematic investing education, videos and products, as well as Managed Accounts
and Guidance pages; and

• We opened two new branches, Cupertino, California and New York, New York, which increased our

total network to 30 branches.

Market Recognition

• We were ranked the nation’s #1 online broker by Kiplinger’s magazine, receiving a five star rating in

both the customer service and investment choices categories; and

• Our corporate services business received top-ratings in overall satisfaction for our commercial
administration systems, plan reporting and technology platform by Group Five, an independent
consulting and research firm, in their 2012 Stock Plan Administration Study Industry Report.

EARNINGS OVERVIEW

2012 Compared to 2011

We incurred a net loss of $112.6 million, or $(0.39) per diluted share, on total net revenue of $1.9 billion for
the year ended December 31, 2012. The net loss for the year ended December 31, 2012 was primarily the result
of losses of $256.9 million from the early extinguishment of all the 12 1⁄ 2% Springing lien notes and 7 7⁄ 8% Notes
during 2012.

fees and service charges, principal

Net operating interest income decreased 11% to $1.1 billion for the year ended December 31, 2012
compared to 2011, which was driven primarily by a decrease in enterprise net interest spread during 2012.
Commissions,
revenue decreased 11% to
$630.9 million for the year ended December 31, 2012, compared to 2011, which was driven primarily by a
decrease in trading activity during 2012. In addition, gains on loans and securities, net increased 67% to $200.4
million for the year ended December 31, 2012 compared to 2011. We recognized additional gains from securities
sold as a result of our continued deleveraging efforts, primarily related to a reduction in wholesale funding
obligations, which resulted in losses on early extinguishment of debt of $78.3 million during the year ended
December 31, 2012.

transactions and other

Provision for loan losses declined 20% to $354.6 million for the year ended December 31, 2012 compared to
2011. The decline was driven primarily by improving credit trends and loan portfolio run-off, offset by an increase
of $50 million related to charge-offs associated with newly identified bankruptcy filings during the third quarter of
2012. Total operating expenses decreased 6% to $1.2 billion for the year ended December 31, 2012 compared to
2011. This decrease was driven primarily by decreases in clearing and servicing and other operating expenses,
partially offset by an increase in compensation and benefits expense for the year ended December 31, 2012.

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

Percentage not meaningful.

Net Operating Interest Income

Year Ended December 31,

2012 vs. 2011

2012

2011

Amount %

Variance

1,085.1
377.8
122.2
93.1
200.4
(16.9)
37.8

$1,220.0
436.2
130.4
105.4
120.2
(14.9)
39.3

$(134.9)
(58.4)
(8.2)
(12.3)
80.2
(2.0)
(1.5)

(11)%
(13)%
(6)%
(12)%
67%
*
(4)%

814.4

816.6

(2.2)

(0)%

1,899.5

$2,036.6

$(137.1)

(7)%

Net operating interest income decreased 11% to $1.1 billion for the year ended December 31, 2012
compared to 2011. Net operating interest income is earned primarily through investing customer cash and
deposits in enterprise interest-earning assets, which include: real estate loans, margin receivables, available-for-
sale securities and held-to-maturity securities.

4.80%
2.92%
3.31%
4.42%
0.22%
0.22%
4.43%

3.74%

0.07%
0.38%
0.25%
0.11%
2.24%
0.15%
2.11%

4.33%
0.26%

0.83%

The following tables present 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 have 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,

2012

2011

2010

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

$12,027.6 $ 496.4
361.1
237.0
216.1
3.6
0.7
48.7

15,236.9
8,408.9
5,471.2
1,668.3
956.0
577.2

4.13% $14,689.8 $ 692.1
422.5
2.37% 15,326.5
136.9
2.82% 4,177.1
221.7
3.95% 5,374.8
3.2
0.21% 1,618.9
0.9
915.6
0.08%
48.8
620.9
8.43%

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

Total enterprise interest-earning assets

44,346.1

1,363.6

3.07% 42,723.6

1,526.1

3.57% 41,130.7

1,539.4

Non-operating interest-earning and non-interest

earning assets(2)

Total assets

Enterprise interest-bearing liabilities:

Deposits:
Sweep Deposits
Complete savings deposits
Other money market and savings deposits
Checking deposits
Certificates of deposit
Customer payables
Securities sold under agreements to repurchase
Federal Home Loan Bank (“FHLB”) advances

and other borrowings
Securities loaned and other

5,068.9

$49,415.0

$20,776.0
5,389.1
1,015.8
890.4
166.0
5,648.4
4,775.1

4,339.5

$47,063.1

4,395.1

$45,525.8

14.7
3.6
0.7
0.7
4.4
10.4
158.5

0.07% $17,513.1
0.07% 6,174.4
0.07% 1,071.5
783.2
0.08%
2.59%
319.5
0.18% 5,456.3
3.32% 5,417.2

2,464.9
676.0

92.6
0.3

3.76% 2,741.1
634.8
0.04%

13.4
16.1
2.5
0.8
10.0
8.6
153.1

106.2
1.5

312.2

0.08% $14,014.4
0.26% 7,577.0
0.23% 1,114.6
761.9
0.10%
3.13%
910.6
0.16% 4,713.2
2.83% 6,154.3

3.87% 2,754.3
622.4
0.23%

0.78% 38,622.7

10.1
28.6
2.8
0.9
20.4
7.0
129.6

119.3
1.6

320.3

Total enterprise interest-bearing liabilities

41,801.7

285.9

0.68% 40,111.1

Non-operating interest-bearing and non-interest

bearing liabilities(3)

Total liabilities
Total shareholders’ equity

2,580.0

44,381.7
5,033.3

Total liabilities and shareholders’ equity

$49,415.0

2,285.9

42,397.0
4,666.1

$47,063.1

2,876.4

41,499.1
4,026.7

$45,525.8

Excess of enterprise interest-earning assets over

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

$ 2,544.4 $1,077.7

2.39% $ 2,612.5 $1,213.9

2.79% $ 2,508.0 $1,219.1

2.91%

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,

2012

2011

2010

$1,077.7
(1.1)
8.5

$1,213.9
(1.2)
7.3

$1,219.1
(1.2)
8.4

$1,085.1

$1,220.0

$1,226.3

(1) Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual 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.

(2) Non-operating interest-earning and non-interest earning assets consist of certain segregated cash balances, 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 operating

(4)

interest expense. Some of these liabilities generate corporate interest expense.
Includes revenue earned on average customer assets of $4.3 billion, $3.7 billion and $3.1 billion for the years ended December 31, 2012, 2011
and 2010, respectively, held by third parties outside the Company, including 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 total shareholders’ equity to average total assets

Year Ended December 31,

2012

2011

2010

2.39%
2.43%

2.91%
2.79%
2.96%
2.84%
106.09% 106.51% 106.49%

(0.23)% 0.33% (0.06)%
(2.24)% 3.36% (0.71)%
8.84%
9.91%
10.19%

The fluctuation in enterprise interest-earning assets is driven primarily by changes in enterprise interest-
bearing liabilities, specifically customer cash and deposits. Average enterprise interest-earning assets increased
4% to $44.3 billion for the year ended December 31, 2012 compared to 2011. This was primarily a result of the
increases in average held-to-maturity securities, offset by a decrease in average loans.

Average enterprise interest-bearing liabilities increased 4% to $41.8 billion for the year ended December 31,
2012 compared to 2011. The increase in average enterprise interest-bearing liabilities was due primarily to an
increase in average deposits offset by a decrease in average securities sold under agreements to repurchase.

Enterprise net interest spread decreased by 40 basis points to 2.39% for the year ended December 31, 2012
compared to 2011, due primarily to lower yields on loans and the impact of the interest rate environment, which
remains challenging. We expect enterprise net interest spread will continue to compress in 2013 and anticipate a
decrease of approximately 10 basis points from 2012; however, enterprise net interest spread may further
fluctuate based on the size and mix of the balance sheet, as well as the impact from the level of interest rates.

Commissions

Commissions revenue decreased 13% to $377.8 million for the year ended December 31, 2012 compared to
2011. 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 customer mix and the different
commission rates on various trade types (e.g. equities, options, fixed income, stock plan, exchange-traded funds,
mutual funds, forex and cross border). Accordingly, changes in the mix of trade types will impact average
commission per trade.

DART volume decreased 12% to 138,112 for the year ended December 31, 2012 compared to 2011. Option-
related DARTs as a percentage of total DARTs represented 24% of trading volume for the year ended
December 31, 2012 compared to 20% in 2011. Exchange-traded funds-related DARTs as a percentage of total
DARTs represented 8% of trading volume for the year ended December 31, 2012 compared to 11% in 2011.
Average commission per trade was $11.01 for both years ended December 31, 2012 and 2011.

Fees and Service Charges

Fees and service charges decreased 6% to $122.2 million for the year ended December 31, 2012 compared to 2011.

The table below shows the components of fees and service charges and the resulting variances (dollars in millions):

Order flow revenue
Mutual fund service fees
Foreign exchange revenue
Reorganization fees
Advisor management fees
Other fees and service charges

Total fees and service charges

Year Ended December 31,

2012 vs. 2011

2012

2011

Amount %

Variance

$ 58.4
16.4
10.3
7.7
6.4
23.0

$122.2

$ 59.1
15.7
11.0
13.4
4.4
26.8

$130.4

$(0.7)
0.7
(0.7)
(5.7)
2.0
(3.8)

$(8.2)

(1)%
4%
(6)%
(43)%
45%
(14)%

(6)%

The decrease in fees and services charges for the year ended December 31, 2012 was driven primarily by
lower reorganization fee revenue in 2012 related to a large public company reorganization in the second quarter
of 2011, and by a decline in other fees and service charges due to decreased customer activity.

Principal Transactions

Principal transactions decreased 12% to $93.1 million for the year ended December 31, 2012 compared to
2011. 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 decrease in principal
transactions revenue was driven primarily by a decrease in trading volume, partially offset by an increase in
average revenue per share earned.

Gains on Loans and Securities, Net

Gains on loans and securities, net increased 67% to $200.4 million for the year ended December 31, 2012
compared to 2011. We recognized additional gains from securities sold as a result of our continued deleveraging
efforts, primarily related to a reduction in wholesale funding obligations, which resulted in losses on early
extinguishment of debt of $78.3 million during the year ended December 31, 2012. The table below shows the
activity and resulting variances (dollars in millions):

Variance

Year Ended December 31,

2012 vs. 2011

2012

2011

Amount %

0.6

0.1

$ 0.5

207.3
(0.3)
(7.2)

199.8

124.4
(1.9)
(2.4)

120.1

82.9
1.6
(4.8)

79.7

$200.4

$120.2

$80.2

67%
*
*

66%

67%

Gains on loans, net

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

Gains on securities, net

Gains on loans and securities, net

Percentage not meaningful.

Net Impairment

We recognized $16.9 million and $14.9 million of net impairment during the years ended December 31,
2012 and 2011, respectively, 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 (loss), 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

Provision for Loan Losses

Year Ended
December 31,

2012

2011

$ (19.8)

$ (9.2)

2.9

(5.7)

$(16.9)

$(14.9)

Provision for loan losses decreased 20% to $354.6 million for the year ended December 31, 2012 compared
to 2011. The decrease in provision for loan losses was driven primarily by improving credit trends, as evidenced
by the lower levels of delinquent loans in the one- to four-family and home equity loan portfolios, and loan
portfolio run-off. The decrease was partially offset by $50 million in charge-offs associated with newly identified
bankruptcy filings during the third quarter of 2012, with approximately 80% related to prior years. We utilize
third party loan servicers to obtain bankruptcy data on our borrowers and during the third quarter of 2012, we
identified an increase in bankruptcies reported by one specific servicer. In researching this increase, we
discovered that the servicer had not been reporting historical bankruptcy data on a timely basis. As a result, we
implemented an enhanced procedure around all servicer reporting to corroborate bankruptcy reporting with
independent third party data. Through this additional process, approximately $90 million of loans were identified
in which servicers failed to report the bankruptcy filing to us, approximately 90% of which were current at the
end of the third quarter of 2012. As a result, these loans were written down to the estimated current value of the
underlying property less estimated selling costs, or approximately $40 million, during the third quarter of 2012.
These charge-offs resulted in an increase to provision for loan losses of $50 million for the year ended
December 31, 2012.

The provision for loan losses has declined four consecutive years, down 78% from its peak of $1.6 billion
for the year ended December 31, 2008. We expect provision for loan losses to continue to decline over the long
term, although it is subject to variability in any given quarter.

Operating Expense

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

Compensation and benefits
Advertising and market development
Clearing and servicing
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

Compensation and Benefits

Year Ended December 31,

2012 vs. 2011

2012

2011

Amount %

Variance

$ 352.7
139.5
128.6
117.2
86.3
74.4
73.1
90.6
25.2
7.7
66.8

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

$ 19.1
(5.7)
(18.5)
11.8
(3.4)
5.6
5.8
1.0
(1.0)
—
(87.5)

6%
(4)%
(13)%
11%
(4)%
8%
8%
1%
(4)%
0%
(57)%

$1,162.1

$1,234.9

$(72.8)

(6)%

Compensation and benefits increased 6% to $352.7 million for the year ended December 31, 2012 compared
to 2011. The increase resulted primarily from $13 million in severance associated with the departure of our
former Chief Executive Officer that was recorded during the year ended December 31, 2012.

Clearing and Servicing

Clearing and servicing decreased 13% to $128.6 million for the year ended December 31, 2012 compared to
2011. These decreases resulted primarily from lower trading volumes and lower loan balances compared to 2011.

FDIC Insurance Premiums

FDIC insurance premiums increased 11% to $117.2 million for the year ended December 31, 2012
compared to 2011. The increase for the year ended December 31, 2012 was due primarily to the new FDIC
insurance premium assessment calculation, effective in the second quarter of 2011.

Other Operating Expenses

Other operating expenses decreased 57% to $66.8 million for the year ended December 31, 2012 compared
to 2011. The decrease was driven primarily by an estimated liability of $48 million related to an offer to purchase
auction rate securities from eligible holders recorded in 2011. The costs of this program, which expired on
May 15, 2012, were approximately $10.2 million less than our previous estimate and a $10.2 million benefit was
recorded during the year ended December 31, 2012. In addition, there was a decrease in expenses related to real
estate owned (“REO”) and repossessed assets for the year ended December 31, 2012 compared to 2011.

Other Income (Expense)

Other income (expense) increased 192% to $513.7 million for the year ended December 31, 2012

compared to 2011 as shown in the following table (dollars in millions):

Corporate interest income
Corporate interest expense
Gains (losses) on early extinguishment of debt:
Corporate debt
Wholesale borrowings
Equity in income (loss) of investments and venture funds

Total other income (expense)

Percentage not meaningful.

Variance

Year Ended December 31,

2012 vs. 2011

2012

2011

Amount %

0.1
(179.9)

$
0.7
(177.8)

(0.6)
(2.1)

*
1%

(256.9)
(78.3)
1.3

3.1
—
(1.8)

(260.0)
(78.3)
3.1

*
*
*

$(513.7)

$(175.8)

$(337.9) 192%

In addition, for the year ended December 31, 2012, $256.9 million in losses on early extinguishment of
corporate debt were recorded, as a result of the early extinguishment of all of the 12 1⁄ 2% Springing lien notes and
7 7⁄ 8% Notes during 2012. We also had $78.3 million in losses on early extinguishment of wholesale borrowings
as a result of the early extinguishment of approximately $1.1 billion in wholesale borrowings during 2012.
During the year ended December 31, 2011, we had $3.1 million in gains on early extinguishment of debt related
to the call of the 7 3⁄ 8% senior notes due September 2013 (“7 3⁄ 8% Notes”) in the second quarter of 2011.

Income Tax Expense (Benefit)

Income tax benefit was $(18.4) million for the year ended December 31, 2012 compared to tax expense of
$28.6 million in 2011. The effective tax rate was (14.0)% for the year ended December 31, 2012 compared to
15.4% in 2011.

During the first quarter of 2012, we recorded an income tax benefit of $26.3 million related to certain losses
on the 2009 Debt Exchange that were previously considered non-deductible. Through additional research
completed in the first quarter of 2012, we identified that a portion of those losses were incorrectly treated as non-
deductible in 2009 and were deductible for tax purposes. The $26.3 million tax benefit resulted in a
corresponding increase to the net deferred tax asset.

In November 2012, California voters approved Proposition 39, which requires most multistate taxpayers to
use a sales factor-only apportionment formula, combined with market–based sourcing for sales, other than sales
of tangible personal property, effective for years beginning on or after January 1, 2013. As a result, the overall
California apportionment for the company’s unitary group decreased significantly and we expect this will
decrease our taxable income in California in future periods. As a result, we no longer expect to utilize net
operating losses in California and we recognized tax expense of $25.1 million consisting of establishing
valuation allowances for California net operating losses, research and development credits and other deferred tax
assets.

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 net deferred tax asset.

Valuation Allowance

The net deferred tax asset was $1,416.2 million and $1,578.7 million at December 31, 2012 and 2011,
respectively. 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. For the three-year period ended December 31, 2012, we were no longer in a cumulative
book loss position. As of December 31, 2012, we did not establish a valuation allowance against federal deferred
tax assets as we believe that it is more likely than not that all of these assets will be realized. Approximately half
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 within the next six years.

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 nine
years, including through uncertain economic and regulatory environments. The core business is driven by
brokerage customer activity and includes trading, brokerage cash, margin lending, retirement and 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 five
years ago. As a result, the losses have continued to decline significantly and the balance sheet management
segment became profitable in 2012. 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 four consecutive years, down 78% 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, 2012, we had state deferred tax assets of approximately
$136.5 million that related to our state net operating loss carry forwards and temporary differences with a
valuation allowance of $52.2 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 2009 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
$1,886.3 million. This amount includes $479.7 million in federal NOLs that were recorded in the third quarter of
2012 due to amended tax returns we filed that related primarily to additional tax deductions on the 2009 Debt
Exchange and additional tax losses on bad debts. Section 382 imposes an annual limitation 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 federal 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 federal NOLs, which
were approximately $1,886.3 million, have a statutory carry forward period of 20 years (the majority of which
expire in 15 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.

2011 Compared to 2010

We generated net income of $156.7 million, or $0.54 per diluted share, on total 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 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 expense 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.

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

Variance

Year Ended December 31,

2011 vs. 2010

2011

2010

Amount %

$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
the year ended
to 2010. Average enterprise interest-earning assets increased 4% to $42.7 billion for
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 interest rate
environment.

Commissions

Commissions revenue increased 1% to $436.2 million for the year ended December 31, 2011 compared to
2010. DART volume increased 5% to 157,475 for the year ended December 31, 2011 compared 2010. Option-
related DARTs as a percentage of total DARTs represented 20% 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 customer mix; specifically customers who have a higher
commission per trade traded less during the year compared to active trader customers, who generally have lower
commissions 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 table below shows the components of fees and service charges and the resulting variances (dollars
in millions):

Order flow revenue
Mutual fund service fees
Foreign exchange revenue
Reorganization fees
Advisor management fees
Account activity fees
Other fees and service charges

Total fees and service charges

Year Ended December 31,

2011 vs. 2010

Variance

2011

$ 59.1
15.7
11.0
13.4
4.4
—
26.8

$130.4

2010

Amount %

$ 60.8
13.2
10.3
9.2
12.2
8.0
28.7

$142.4

$ (1.7)
2.5
0.7
4.2
(7.8)
(8.0)
(1.9)

$(12.0)

(3)%
19%
7%
46%
(64)%
(100)%
(7)%

(8)%

The decrease in fees and services charges for the year ended December 31, 2011 was primarily due to the
elimination of all account activity fees, which became effective in the second quarter of 2010, and due to a
decrease in advisor management fees. These decreases were partially offset by an increase in reorganization fee
revenue related to a large public company reorganization in the second quarter of 2011.

Principal Transactions

Principal transactions increased 2% to $105.4 million for 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.

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.

Net Impairment

Variance

Year Ended 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)%

We recognized $14.9 million and $37.7 million of net impairment during the years ended December 31,
2011 and 2010, respectively, 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
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 (out of) other

comprehensive income (loss) (before tax)

Net impairment

Year Ended December, 31,

2011

2010

$ (9.2)

$(41.5)

(5.7)

3.8

$(14.9)

$(37.7)

Other Revenues

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.

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,

2011 vs. 2010

2011

2010

Amount %

Variance

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

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

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

3%
10%
(0)%
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 an increase of 42% in
financial consultants, 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 a 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 an estimated liability 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 estimated liability related primarily to our
estimate of the securities’ current fair value relative to their par value and included 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 estimated liability 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 December 31,

2011 vs. 2010

2011

2010

Amount %

Variance

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) for the year ended December 31, 2011 primarily consisted of corporate
interest expense on interest-bearing corporate debt. 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 7 3⁄ 8% 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 $1,578.7 million 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

During the year ended December 31, 2011, 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 the 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, 2011, which is considered significant and
objective evidence that we may not be able to realize some portion of 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; loans
previously originated by the Company or purchased from third parties; customer cash and deposits; and credit,
liquidity and interest rate risk for the Company as described in the Risk Management section. 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 20—Segment Information in Item 8. Financial Statements and
Supplementary Data.

Trading and Investing

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

the years ended December 31, 2012, 2011 and 2010 (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

2012 vs. 2011

2012

2011

2010

Amount

640.5
377.8
119.4
93.2
32.0

746.1
436.2
128.0
105.4
31.2

763.0
431.0
139.1
103.4
37.9

$ (105.6)
(58.4)
(8.6)
(12.2)
0.8

(14)%
(13)%
(7)%
(12)%
3%

1,262.9
769.2

1,446.9
825.9

1,474.4
752.6

(184.0)
(56.7)

(13)%
(7)%

Trading and investing income

493.7

621.0

721.8

$ (127.3)

(20)%

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

Percentage not meaningful.

$
$

138,112
11.01
5.8
2,903,191
120,179

9.0%

201.2
10.4
33.9

$
$
$

157,475
11.01
4.8
2,783,012
98,701
10.3%
172.4
9.7
27.7

$
$

$
$
$

150,532
11.21
5.1
2,684,311
54,232
12.2%
176.2
8.1
24.5

$
$

$
$
$

(19,363)

$ —
1.0
$
120,179
21,478
(1.3)%
28.8
0.7
6.2

$
$
$

(12)%
0%
21%
4%
22%
*
17%
7%
22%

The trading and investing segment offers products and services to individual retail investors, generating
revenue from these brokerage and banking relationships 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. Net operating interest income is generated
primarily from margin receivables and from a deposit transfer pricing arrangement with the balance sheet
management segment. The balance sheet management segment utilizes the vast majority of customer cash and
deposits and compensates the trading and investing segment via a market-based transfer pricing arrangement.
This compensation is reflected in segment results as operating interest income for the trading and investing
segment and operating interest expense for the balance sheet management segment and is eliminated in
consolidation. Customer cash and deposits utilized by the balance sheet management segment include retail
deposits and customer payables. 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.

2012 Compared to 2011

Trading and investing income decreased 20% to $493.7 million for the year ended December 31, 2012
compared to 2011. We continued to generate net new brokerage accounts, ending the year with 2.9 million
accounts. Brokerage related cash, which is one of our most profitable sources of funding, increased by $6.2
billion when compared to 2011.

Trading and investing commissions decreased 13% to $377.8 million for the year ended December 31, 2012
compared to 2011. This decrease in commissions was primarily the result of a decrease in DARTs of 12% to
138,112 for the year ended December 31, 2012 compared to 2011.

Trading and investing fees and service charges decreased 7% to $119.4 million for the year ended
December 31, 2012 compared to 2011. This decrease for the year ended December 31, 2012 was driven by lower
reorganization fee revenue in 2012 related to a large public company reorganization in the second quarter of
2011.

Trading and investing principal

the year ended
December 31, 2012 compared to 2011. The decrease in principal transactions revenue was driven primarily by a
decrease in trading volume, partially offset by an increase in average revenue per share earned, when compared
to 2011.

transactions decreased 12% to $93.2 million for

Trading and investing operating expense decreased 7% to $769.2 million for the year ended December 31,
2012 compared to 2011. The decrease for the year ended December 31, 2012 was driven primarily by an
estimated liability of $48 million that was recorded in 2011 related to an offer to purchase auction rate securities
from eligible holders. The costs of this program, which expired on May 15, 2012, were approximately
$10.2 million less than our previous estimate and a $10.2 million benefit was recorded during the year ended
December 31, 2012.

As of December 31, 2012, we had approximately 2.9 million brokerage accounts, 1.1 million stock plan
accounts and 0.4 million banking accounts. For the years ended December 31, 2012 and 2011, our brokerage
products contributed 71% and 69%, respectively, and our banking products contributed 29% and 31%,
respectively, of total trading and investing net revenue.

2011 Compared to 2010

Trading and investing segment 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. Brokerage related cash 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. The 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. The 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 the 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 an
estimated liability 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 estimated liability related primarily to our estimate of the securities’ current fair
value relative to their par value and included penalties and other estimated settlement costs. In addition,
compensation and benefits expense increased 8% to $245.8 million as a result of an increase of 42% in financial
consultants.

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.

Balance Sheet Management

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

for the years ended December 31, 2012, 2011 and 2010 (dollars in millions):

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

Variance

Year Ended December 31,

2012 vs. 2011

2012

2011

2010

Amount %

$444.6
2.8
200.8
(16.9)
5.5

$473.9
2.4
121.2
(14.9)
7.2

$ 463.3
3.2
166.3
(37.7)
8.4

$ (29.3)
0.4
79.6
(2.0)
(1.7)

636.8
354.6
220.6

589.8
440.6
238.4

603.5
779.4
215.5

47.0
(86.0)
(17.8)

(6)%
17%
66%
*
(24)%

8%
(20)%
(7)%

Balance sheet management income (loss)

$ 61.6

$ (89.2) $ (391.4) $ 150.8

Key Metrics:

Special mention loan delinquencies
Allowance for loan losses

Percentage not meaningful.

$342.2
$480.7

$467.1
$822.8

$ 589.4
$1,031.2

$(124.9)
$(342.1)

(27)%
(42)%

The balance sheet management segment generates revenue from managing loans previously originated by
the Company or purchased from third parties, as well as utilizing customer cash and deposits to generate
additional net operating interest income. The balance sheet management segment utilizes customer cash and
deposits from the trading and investing segment, wholesale borrowings and proceeds from loan pay-downs to
invest in available-for-sale and held-to-maturity securities. Net operating interest income is generated from
interest earned on available-for-sale and held-to-maturity securities and loans receivable, net of interest paid on
wholesale borrowings and on a deposit transfer pricing arrangement with the trading and investing segment. The
balance sheet management segment utilizes the vast majority of customer cash and deposits and compensates the
trading and investing segment via a market-based transfer pricing arrangement. This compensation is reflected in
segment results as operating interest income for the trading and investing segment and operating interest expense
for the balance sheet management segment and is eliminated in consolidation. Customer cash and deposits
utilized by the balance sheet management segment include retail deposits and customer payables.

2012 Compared to 2011

The balance sheet management segment reported income of $61.6 million and a loss of $89.2 million for the
years ended December 31, 2012 and 2011, respectively. Balance sheet management income was due primarily to
a decrease in provision for loan losses of 20% to $354.6 million for the year ended December 31, 2012.

Gains on loans and securities, net increased 66% to $200.8 million for the year ended December 31, 2012
compared to 2011. We recognized additional gains from securities sold as a result of our continued deleveraging
efforts, primarily related to a reduction in wholesale funding obligations, which resulted in losses on early
extinguishment of debt of $78.3 million during the year ended December 31, 2012.

We recognized $16.9 million and $14.9 million of net impairment during the year ended December 31, 2012
and 2011, respectively, 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.

Total balance sheet management operating expense decreased 7% to $220.6 million for the year ended
December 31, 2012 compared to 2011. The decrease in operating expense for the year ended December 31, 2012
resulted primarily from lower clearing and service expense due to lower loan balances compared to 2011, and a
decrease in expenses related to REO and repossessed assets. These decreases were offset by an increase in FDIC
insurance premium expense as a result of an industry wide change in the FDIC insurance premium assessment
calculation, effective in the second quarter of 2011.

2011 Compared to 2010

The balance sheet management segment reported losses of $89.2 million and $391.4 million for the years
ended December 31, 2011 and 2010, respectively. The losses in this segment were due primarily to the provision
for loan losses of $440.6 million and $779.4 million for the years ended December 31, 2011 and 2010,
respectively.

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 and $37.7 million of net impairment during the years ended December 31,
2011 and 2010, 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.

Provision for loan losses decreased 43% to $440.6 million for the year ended December 31, 2011 compared
to 2010. The decrease in the provision for loan losses was driven by improving credit trends and loan portfolio
run-off, as evidenced by lower levels of delinquent loans in the one- to four- family and home equity loan
portfolios.

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.

Corporate/Other

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

2012, 2011 and 2010 (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,

2012 vs. 2011

2012

2011

2010

Amount %

(0.2) $

(0.1) $ — $

(0.1)

81.0
37.5
5.5
1.7
16.3
7.7
22.6

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

15%
10.7
2.1
6%
2.8 104%
13%
0.2
(11)%
(2.1)
0%
—
(34)%
(11.9)

172.3

170.5

174.5

1.8

(172.5)
(513.7)

(170.6)
(175.8)

(174.5)
(159.0)

(1.9)

1%
(337.9) 192%

$(686.2) $(346.4) $(333.5) $(339.8)

98%

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.

2012 Compared to 2011

The corporate/other loss before income taxes was $686.2 million for the year ended December 31, 2012,

compared to $346.4 million in 2011.

The operating loss increased 1% to $172.5 million for the year ended December 31, 2012 compared to 2011
due primarily to an increase in compensation and benefits as a result of $13 million in severance associated with
the departure of our former Chief Executive Officer that was recorded during the year ended December 31, 2012.
This increase was partially offset by a decrease in other operating expense primarily due to the recording of a net
estimated liability of $10.8 million related to a memorandum of understanding that we entered into to settle the
Freudenberg Action during the year ended December 31, 2011, for which there was no similar expense in 2012.

Total other income (expense) included corporate interest expense on interest-bearing corporate debt for the
years ended December 31, 2012 and 2011. Corporate interest expense increased 1% to $179.9 million year ended
December 31, 2012 compared to 2011. In addition, for the year ended December 31, 2012, $256.9 million in
losses on early extinguishment of debt were recorded, driven by the early extinguishment of all of the
outstanding 12 1⁄ 2% Springing lien notes and 7 7⁄ 8% Notes during 2012. Offsetting corporate interest expense for
the year ended December 31, 2011 as a $3.1 million in gain on early extinguishment of debt related to the call of
the 7 3⁄ 8% Notes in the second quarter of 2011.

2011 Compared to 2010

The corporate/other loss before income tax 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 estimated liability 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 7 3⁄ 8% Notes in the second quarter of 2011.

BALANCE SHEET OVERVIEW

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

millions):

Assets:

Cash and equivalents
Segregated cash
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

December 31,

Variance

2012 vs. 2011

2012

2011

Amount

$ 2,761.5
376.9
23,084.2
5,804.0
10,098.7
67.4
5,194.0

$ 2,099.8
1,275.6
21,785.4
4,826.3
12,332.8
140.2
5,480.4

661.7
(898.7)
1,298.8
977.7
(2,234.1)
(72.8)
(286.4)

32%
(70)%
6%
20%
(18)%
(52)%
(5)%

$47,386.7

$47,940.5

$ (553.8)

(1)%

$28,392.5
5,715.6
4,964.9
1,765.0
1,644.2

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

$ 1,932.5
(2,036.8)
(626.0)
271.5
(71.5)

7%
(26)%
(11)%
18%
(4)%

42,482.2
4,904.5

43,012.5
4,928.0

(530.3)
(23.5)

(1)%
(1)%

Total liabilities and shareholders’ equity

$47,386.7

$47,940.5

$ (553.8)

(1)%

(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.

Segregated Cash

Segregated cash decreased by $0.9 billion during the year ended December 31, 2012. The level of cash
required to be segregated under federal or other regulations, or segregated cash, is driven largely by customer
cash and securities lending balances we hold as a liability in excess of the amount of margin receivables and

securities borrowed balances we hold as an asset. The excess represents customer cash that we are required by
our regulators to segregate for the exclusive benefit of our brokerage customers.

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

2012 vs. 2011

2012

2011

Amount

101.3 $

54.4 $

46.9

86%

$12,097.2 $13,965.7 $(1,868.5) (13)%
(106.4) (31)%

341.6

235.2

12,332.4
1,110.6

14,307.3
1,344.2

(1,974.9) (14)%
(233.6) (17)%

Total available-for-sale securities

$13,443.0 $15,651.5 $(2,208.5) (14)%

Held-to-maturity securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and CMOs

Investment securities

1,652.4

783.0

$ 7,887.5 $ 5,296.5 $ 2,591.0

49%
869.4 111%

Total held-to-maturity securities

$ 9,539.9 $ 6,079.5 $ 3,460.4

57%

Total securities

$23,084.2 $21,785.4 $ 1,298.8

Securities represented 49% and 45% of total assets at December 31, 2012 and 2011, respectively. The
decline in available-for-sale securities during the year ended December 31, 2012 was due primarily to a decrease
of $1.9 billion in agency mortgage-backed securities and CMOs. We sold agency mortgage-backed securities and
CMOs to reduce asset balances driven primarily by the reduction of $2.0 billion in wholesale borrowings, $1.5
billion of which was due to deleveraging initiatives.

The increase in held-to-maturity securities was due primarily to an increase of $2.6 billion in agency
mortgage-backed securities and CMOs. The purchases of securities were driven primarily by the increase in
customer deposits during the first nine months of 2012, which we invested in available-for-sale and held-to-
maturity securities.

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

2012 vs. 2011

2012

2011

Amount

$ 5,442.2
4,223.4
844.9
68.9
(480.7)

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

$(1,173.6)
(1,105.3)
(268.3)
(29.0)
342.1

(18)%
(21)%
(24)%
(30)%
(42)%

$10,098.7

$12,332.8

$(2,234.1)

(18)%

Loans receivable, net decreased 18% to $10.1 billion at December 31, 2012 from $12.3 billion at
December 31, 2011. 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.

During the year ended December 31, 2012, the allowance for loan losses decreased by $342.1 million from
the level at December 31, 2011. During the first quarter of 2012, we completed an evaluation of certain programs
and practices that were designed in accordance with guidance from our former regulator, the OTS. This
evaluation was initiated in connection with our transition from the OTS to the OCC, our new primary banking
regulator. As a result of our evaluation, loan modification policies and procedures were aligned with the guidance
from the OCC. The review resulted in a significant increase in charge-offs during the first quarter of 2012. The
majority of the losses associated with these charge-offs were previously reflected in the specific valuation
allowance and qualitative component of the general allowance for loan losses at December 31, 2011. 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 component.

Deposits

Deposits are summarized as follows (dollars in millions):

Sweep deposits
Complete savings deposits
Checking deposits
Other money market and savings deposits
Time deposits

Total deposits

December 31,

Variance

2012 vs. 2011

2012

2011

Amount

$21,253.6
4,981.6
1,055.4
995.2
106.7

$18,619.0
5,720.8
863.3
1,033.2
223.7

$2,634.6
(739.2)
192.1
(38.0)
(117.0)

14%
(13)%
22%
(4)%
(52)%

$28,392.5

$26,460.0

$1,932.5

Deposits represented 67% and 62% of total liabilities at December 31, 2012 and 2011, respectively. At
December 31, 2012, 92% of our customer deposits were covered by FDIC insurance. Deposits provide the
benefit of lower interest costs compared with wholesale funding alternatives. Deposits increased 7% to $28.4
billion at December 31, 2012 from $26.5 billion at December 31, 2011. The increase was driven primarily by an
increase of $2.6 billion in sweep deposits. The increase in sweep deposits was driven by an increase in customer
inflows during the year ended December 31, 2012, offset by a reduction of $1.7 billion in sweep deposits that
were transferred off of the balance sheet to third parties, as a result of deleveraging initiatives and the dissolution
of our third bank charter.

The deposits balance is a component of the total customer cash and deposits balance reported as a customer
activity metric of $41.0 billion and $35.5 billion at December 31, 2012 and 2011, respectively. The total
customer cash and deposits balance is summarized as follows (dollars in millions):

December 31,

Variance

2012 vs. 2011

2012

2011

Amount

Deposits
Less: brokered certificates of deposit

$28,392.5
(11.2)

$26,460.0
(33.2)

$1,932.5
22.0

Retail deposits
Customer payables
Customer cash balances held by third parties and other

28,381.3
4,964.9
7,644.2

26,426.8
5,590.9
3,520.1

1,954.5
(626.0)
4,124.1

7%
(66)%

7%
(11)%
117%

Total customer cash and deposits

$40,990.4

$35,537.8

$5,452.6

15%

The decrease in customer payables during the year ended December 31 2012 was primarily due to
deleveraging initiatives as $0.9 billion was transferred off of the balance sheet to third parties during the fourth
quarter of 2012. The increase in customer cash balances held by third parties and other was also related to
deleveraging initiatives and consisted of sweep deposits and customer payables that were transferred off of the
balance sheet during the year ended December 31, 2012 in addition to customer cash that is being directed to
third party money funds upon new account opening.

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

2012 vs. 2011

2012

2011

Amount

Securities sold under agreements to repurchase

$4,454.7

$5,015.5

$ (560.8)

(11)%

FHLB advances
Subordinated debentures
Other

$ 831.7
427.7
1.5

$2,302.7
427.6
6.6

$(1,471.0)
0.1
(5.1)

(64)%
0%
(77)%

Total FHLB advances and other borrowings

$1,260.9

$2,736.9

$(1,476.0)

(54)%

Total wholesale borrowings

$5,715.6

$7,752.4

$(2,036.8)

(26)%

Wholesale borrowings represented 13% and 18% of total liabilities at December 31, 2012 and 2011,
respectively. Securities sold under agreements to repurchase and FHLB advances are the primary wholesale
funding sources of the Bank. The decline in wholesale borrowings of $2.0 billion during the year ended
December 31, 2012 was driven by decreases of $1.5 billion in FHLB advances and $560.8 million in securities
sold under agreements to repurchase. These decreases included $1.5 billion as part of our deleveraging
initiatives, $1.1 billion of which were early terminations of the wholesale borrowings that resulted in
approximately $78 million of losses on early extinguishment of debt during the year ended December 31, 2012.

Corporate Debt

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

December 31, 2012
Interest-bearing notes:

6 3⁄4% Notes, due 2016
6% Notes, due 2017
6 3⁄ 8% Notes, due 2019

Total interest-bearing notes

Non-interest-bearing debt:

0% Convertible debentures, due 2019

Face Value Discount

Fair Value Hedge
Adjustment

Net

$ 435.0 $
505.0
800.0

(5.8)
(4.6)
(7.3)

1,740.0

(17.7)

42.7

—

$ —
—
—

—

$ 429.2
500.4
792.7

1,722.3

42.7

Total corporate debt

$1,782.7 $ (17.7)

$ —

$1,765.0

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

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

During the fourth quarter of 2012, we issued an aggregate principal amount of $505 million of 6% Notes
and $800 million of 6 3⁄ 8% Notes. We used the proceeds to redeem all of the outstanding 12 1⁄ 2% Springing lien
notes and 7 7⁄ 8% Notes, which resulted in $256.9 million in losses on early extinguishment for the year ended
December 31, 2012. This transaction will result in an annual after-tax savings of approximately $60 million.

Shareholders’ Equity

The activity in shareholders’ equity during the year ended December 31, 2012 is summarized as follows

(dollars in millions):

Beginning balance, December 31, 2011

Net loss
Net change from available-for-sale securities
Net change from cash flow hedging instruments
Other(1)

Common Stock /
Additional Paid-In
Capital

Accumulated Deficit /
Other
Comprehensive Loss

$7,309.7

—
—
—
12.4

$(2,381.7)
(112.6)
68.6
5.6
2.5

Total

$4,928.0
(112.6)
68.6
5.6
14.9

Ending balance, December 31, 2012

$7,322.1

$(2,417.6)

$4,904.5

(1) Other includes employee share-based compensation, conversions of convertible debentures and changes in accumulated other

comprehensive loss from foreign currency translation.

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.

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 can fluctuate in any given period, are
more than sufficient to meet our needs for the foreseeable future.

Capital is generated primarily through the business operations of the trading and investing and balance sheet
management segments, which are primarily 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. As of December 31, 2012, E*TRADE Bank’s Tier 1 leverage ratio was 8.7%, an increase from
7.8% at December 31, 2011. We are focused on improving the Tier 1 leverage ratio at E*TRADE Bank through
deleveraging the balance sheet by a reduction in wholesale borrowings, retail deposits and customer payables.

Consolidated Cash and Equivalents

The consolidated cash and equivalents balance increased by $661.7 million to $2.8 billion at December 31,
2012 when compared to 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 and equivalents

December 31,

Variance

2012

2011

2012 vs. 2011

$ 407.6
2,319.6
34.3

$ 484.4
1,574.1
41.3

$ (76.8)
745.5
(7.0)

$2,761.5

$2,099.8

$661.7

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. In
the fourth quarter of 2012, we refinanced $1.3 billion of our higher yielding corporate debt resulting in a decrease
in our annual debt service costs of approximately $55 million. We target corporate cash to be at least two times
our annual debt service, or approximately $220 million. From the level of corporate cash at December 31, 2012,
we expect that it will decline generally in line with our corporate interest expense. However, the parent company
has approximately $450 million in net 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 primary regulators. At December 31,
2012 and 2011, E*TRADE Bank had $1.6 billion and $1.2 billion, respectively, of Tier 1 leverage capital in
excess of the regulatory minimum level required to be considered “well capitalized.”

The Company’s broker-dealer subsidiaries are subject to capital requirements determined by their respective
regulators. At December 31, 2012 and 2011, all of our brokerage subsidiaries met their minimum net capital
requirements. Our broker-dealer subsidiaries had excess net capital of $655.1 million at December 31, 2012, a
decrease of $20.0 million from $675.1 million at December 31, 2011. The excess net capital of the broker-dealer
subsidiaries at December 31, 2012 included $535.3 million and $79.1 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 capital of E*TRADE Bank.

Financial Regulatory Reform Legislation and Basel III Framework

Under the Dodd-Frank Act, our former primary regulator, the OTS, was abolished in 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,
that directly or indirectly control an insured
depository institution to serve as a source of strength for the institution.

including savings and loan holding companies,

The implementation of holding company capital requirements will impact us as the parent company was not
previously subject to regulatory capital requirements. These requirements are expected to become effective
within the next three years. We believe these capital ratios are an important measure of capital strength and
accordingly manage our capital against the current capital ratios that apply to bank holding companies in

preparation for the application of these requirements. The Tier 1 leverage, Tier 1 risk-based capital and total risk-
based capital ratios are non-GAAP measures as the parent company is not yet held to these regulatory 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 1 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,

2012

2011

2010

$ 4,904.5

$ 4,928.0

$ 4,052.4

(315.4)
1,899.4

(389.6)
1,947.5

(439.9)
2,046.4

433.0

3,753.5

3,803.1

2,878.9

1,278.9

2,474.6

1,331.0

2,472.1

1,351.3

1,527.6

251.8

277.6

295.6

$ 2,726.4

$ 2,749.7

$ 1,823.2

$48,152.7

$46,964.2

$46,043.4

1,899.4

1,947.5

2,046.4

46,253.3

45,016.7

43,997.0

1,278.9

1,331.0

1,351.3

$44,974.4

$43,685.7

$42,645.7

$19,849.9

$21,668.1

$22,915.8

Tier 1 leverage ratio (Tier 1 capital / Average total assets for leverage capital

purposes)

Tier 1 capital / Total risk-weighted assets
Total capital / Total risk-weighted assets

5.5%
12.5%
13.7%

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.

As of December 31, 2012, the parent company Tier 1 leverage ratio was approximately 5.5% compared to
the minimum ratio required to be “well capitalized” of 5%, the Tier 1 risk-based capital ratio was approximately
12.5% compared to the minimum ratio required to be “well capitalized” of 6%, and the total risk-based capital
ratio was approximately 13.7% compared to the minimum ratio required to be “well capitalized” of 10%.

Our Tier 1 common ratio, which is a non-GAAP measure and currently has no mandated minimum or “well
capitalized” standard, was 10.3% as of December 31, 2012. We believe this ratio is an important measure of our
capital strength. The Tier 1 common ratio is defined as Tier 1 capital less elements of Tier 1 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 the Tier 1 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 1 common

December 31,

2012

2011

2010

$ 4,904.5

$ 4,928.0

$ 4,052.4

(315.4)
1,899.4

3,320.5

(389.6)
1,947.5

3,370.1

(439.9)
2,046.4

2,445.9

1,278.9

1,331.0

1,351.3

$ 2,041.6

$ 2,039.1

$ 1,094.6

Total risk-weighted assets
Tier 1 common ratio (Tier 1 common / Total risk-weighted assets)

$19,849.9

$21,668.1

$22,915.8

10.3%

9.4%

4.8%

In June 2012, the U.S. Federal banking agencies published notices of proposed rulemaking for comment
related to the implementation of the Basel III framework for the calculation and components of a banking
organization’s regulatory capital and a U.S. version of the international standardized approach for calculating a
banking organization’s risk-weighted assets. In November 2012, the banking agencies announced a delay in the
implementation of Basel III in the U.S. and have not yet issued final Basel III rules. We believe the most relevant
elements of the proposal to us relate to the proposed risk-weighting of mortgage loans and margin receivables in
addition to the inclusion in the calculation of Common Tier 1 capital of unrealized gains (losses) on all available-
for-sale debt securities. Under the current proposal, we do not believe the incorporation of these elements have a
significant impact on our current capital ratios; however, the final impact of the Basel III capital standards on
regulatory requirements will remain uncertain until the final rules implementing Basel III are adopted for U.S.
institutions. We will continue to monitor the ongoing rule-making and comment process to assess both the timing
and the impact of the Dodd-Frank Act and Basel III capital standards on our business.

On October 9, 2012, the Federal Reserve adopted final regulations implementing the requirement for certain
Federal Reserve-regulated savings and loan holding companies, including the Company, to conduct company-run
stress tests on an annual basis. Under the Federal Reserve’s stress test regulations, we will be required to utilize
stress-testing methodologies providing for results under at least three different sets of conditions, including
baseline, adverse, and severely adverse conditions. The final regulations will apply to the Company in the fall of
the calendar year after it becomes subject to minimum capital requirements, a period which has not yet been
specified. We conducted a company-run stress test for the Company, which we believe is consistent with the
Federal Reserve’s methodologies, and provided the results to the Federal Reserve with the submission of the
long-term strategic and capital plan.

Also on October 9, 2012, the OCC adopted final regulations implementing the requirement for national
banks or federal savings associations with over $10 billion in average total consolidated assets, including
E*TRADE Bank,
to conduct company-run stress tests on an annual basis. Under the OCC’s stress test
regulations, E*TRADE Bank also will be required to utilize stress-testing methodologies providing for results
under at least three different sets of conditions, including baseline, adverse and severely adverse scenarios. The
final regulations require E*TRADE Bank to conduct its first stress test using financial statement data as of
September 30, 2013, and it will be required to report results to the OCC on or before March 31, 2014. We
conducted a company-run stress test for E*TRADE Bank, which we believe is consistent with the OCC’s
methodologies, and provided the results to the OCC with submission of the long-term strategic and capital plan.

Other Sources of Liquidity

We also maintain uncommitted lines of credit with unaffiliated banks to finance margin lending, with
available balances subject to approval when utilized. At December 31, 2012, there were no outstanding balances.

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 borrow from the
Federal Reserve Bank’s discount window to meet short-term liquidity requirements, although it is not viewed as
a primary source of funding. At December 31, 2012, E*TRADE Bank had approximately $3.9 billion and $1.1
billion in additional collateralized borrowing capacity with the FHLB and the 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 account products.

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 19—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, 2012 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

$3,421.1
188.3
110.7
1.3

1-3 Years

3-5 Years

Thereafter

Total

$ 578.9
136.7
221.3
1.9

$ 514.6
688.4
1,111.0
136.6

$ — $4,514.6
1,661.6
2,381.3
492.0

648.2
938.3
352.2

66.3
21.5
59.2

34.0
44.4
24.5

9.0
41.4
—

0.4
58.4
—

109.7
165.7
83.7

Total contractual obligations

$3,868.4

$1,041.7

$2,501.0

$1,997.5

$9,408.6

(1)

(2)

(3)

Includes annual interest based on the contractual features of each transaction, using market rates at December 31, 2012. 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 with initial or remaining terms in excess of one year 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, 2012, the Company had $0.3 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, 2012,
the Company had no commitments to purchase or originate loans and had a commitment to sell mortgage loans
of $1.0 million. The Company had a commitment to purchase and sell securities of $335.1 million and
$282.2 million, respectively. The Company also had $4.4 million in commitments to fund low income housing
tax credit partnerships and other limited partnerships as of December 31, 2012. Additional information related to
commitments and contingent
liabilities is detailed in Note 19—Commitments, Contingencies and Other
Regulatory Matters of Item 8. Financial Statements and Supplementary Data.

RISK MANAGEMENT

As a financial services company, our business exposes us to certain risks. The identification, mitigation and
management of existing and potential risks are key to effective enterprise risk management. There are certain
risks that are inherent to our business (e.g. execution of transactions) whereas other risks will present themselves
through the conduct of that business. We seek to monitor and manage our significant risk exposures through a set
of board approved limits as well as Key Risk Indicators (“KRIs”) or metrics. We have in place a governance
framework that regularly reports metrics, major risks and exposures to senior management and the Board of
Directors. In 2013, we will continue to enhance our risk culture and capabilities while complying with evolving
regulatory guidelines and expectations.

We developed a Board-approved Risk Appetite Statement (“RAS”) which was disseminated to all
employees and specifies the significant risks we are exposed to and our tolerance of those risks. As described in
the RAS, our business exposes us to the following eight major categories of risk:

• Credit Risk—the risk of loss arising from the inability or failure of a borrower or counterparty to meet

its credit obligations.

•

Interest Rate Risk—the risk of loss of income or value of future income due to changes in interest rates
arising from the Company’s balance sheet position. This includes convexity risk, which arises from
optionality in the balance sheet, related to deposit flows or to prepayments in mortgage assets.

Liquidity Risk—the potential inability to meet contractual and contingent financial obligations either
on- or off-balance sheet, as they come due.

• Market Risk—the risk that asset values or income streams will be adversely affected by changes in

market prices.

• Operational Risk—the risk of loss due to failure of people, processes and systems, or damage to

physical assets caused by unexpected events.

•

Strategic Risk—sometimes called business risk, is the risk of loss of market size, market share or
margin in any business.

• Reputational Risk—the potential that negative perceptions regarding our conduct or business practices
will adversely affect valuation, profitability, operations or customer base or require costly litigation or
other measures.

•

Legal, Regulatory and Compliance Risk—the current and prospective risk to earnings or capital arising
from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, internal
policies, and procedures, or ethical standards.

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 senior management and several risk committees
that include members of the Board of Directors. We use senior management-level risk committees to help ensure
that business decisions are executed within our stated risk profile and consistent with the RAS. 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.
Certain risks are described in the RAS and related policies which establish processes and limits. The RAS and
these policies are reviewed, challenged and approved by the Board of Directors on at least an annual basis.

The Risk Oversight Committee, which consists of members of the Board of Directors, reviews, challenges
and approves the RAS and risk policies each year, receives regular reports on the status of certain limits and
KRIs as well as discusses certain key risks. In addition to this Board-level committee, various management risk
committees and departments throughout the Company aid in the identification, measurement and management of
risks, including:

• Enterprise Risk Management Committee—the Enterprise Risk Management Committee (“ERMC”) is
the senior-most risk management committee and has primary responsibility for approving risk limits
and monitoring the Company’s risk management activities. The ERMC also resolves issues escalated
by the other risk management committees and in certain instances approves exceptions to risk policies.

• Asset Liability Committee—the Asset Liability Committee (“ALCO”) has primary responsibility for
monitoring of market, interest rate and liquidity risk, and recommends related risk limits to be
approved by the ERMC.

• Credit Committee—the Credit Committee has responsibility for monitoring credit risks and approving

risk limits or recommending risk limits to be approved by the ERMC.

• Operational Risk Committee—the Operational Risk Committee (“ORC”) has responsibility for the
oversight and management of the operational risks in all business lines, legal entities, and departments,
including the development and reporting of key operational risk metrics. The ORC has oversight of
operational risk management in the existing enterprise risk categories, including: transactions execution
risk, security risk,
legal and regulatory risks, systems and information technology risks, and
employment risks.

Credit Risk Management

Credit risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its

credit obligations. We are exposed to credit risk in the following areas:

• We hold credit risk exposure in our loan portfolio. We are not currently originating or purchasing loans

for investment. Even though the portfolio is running off, losses are likely to remain significant.

• We hold credit risk exposure to non-agency CMOs in our investment securities portfolio. We are not
currently purchasing non-agency CMOs for investment. Even though the portfolio is running off,
impairments are likely to continue in the future.

• We extend margin loans to our brokerage customers which exposes us to the risk of credit losses in the

event we cannot liquidate collateral during significant market movements.

• We engage in financial transactions with counterparties which expose us to credit losses in the event a
counterparty cannot meet its obligations. These financial transactions include our invested cash,
securities lending, repurchase and reverse repurchase agreements and derivatives contracts, as well as
the settlement of trades.

Credit risk is monitored by our Credit Committee, whose objective is to evaluate current and expected credit
performance of the Company’s loans, investments, borrowers and counterparties relative to market conditions
and the probable impact on the Company’s financial performance. The Credit Committee establishes credit risk

guidelines in accordance with the Company’s strategic objectives and existing policies. The Credit 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 Committee reviews and approves credit related counterparties engaged in
financial transactions with the Company.

Loss Mitigation on the Loan Portfolio

We have a credit risk operations 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 $0.3 billion as of December 31, 2012.

We utilize third party loan servicers to obtain bankruptcy data on our borrowers and during the third quarter
of 2012, we identified an increase in bankruptcies reported by one specific servicer. In researching this increase,
we discovered that the servicer had not been reporting historical bankruptcy data on a timely basis. As a result,
we implemented an enhanced procedure around all servicer reporting to corroborate bankruptcy reporting with
independent third party data. Through this additional process, approximately $90 million of loans were identified
in which servicers failed to report the bankruptcy filing to us. As a result, these loans were written down to the
estimated current value of the underlying property less estimated selling costs, or approximately $40 million,
during the third quarter of 2012. These charge-offs resulted in an increase to provision for loan losses of $50
million in the third quarter of 2012.

We 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 has improved and will
continue to 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. A total of $2.8 billion of our
mortgage loans were held at servicers that specialize in managing troubled assets as of December 31, 2012.

We 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, 2012, we modified $339.1 million and $31.7 million of
one- to four-family and home equity loans, respectively, in which the modification was considered a TDR.
During the first quarter of 2012, we completed an evaluation of certain programs and practices that were
designed in accordance with guidance from our former regulator, the OTS. This evaluation was initiated in
connection with our transition from the OTS to the OCC, our new primary banking regulator. As a result of our
evaluation, loan modification policies and procedures were aligned with the guidance from the OCC. During the
fourth quarter of 2011, we suspended certain home equity loan modification programs that required changes.
These suspended programs were discontinued in the first quarter of 2012, which has resulted in 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.

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, 2012 and 2011, we had $33.4 million and $41.7 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 at both December 31, 2012 and 2011.

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. During the second quarter of 2012, we agreed to settlements with
two particular originators specific to loans sold to us by those originators. One-time payments of $11.2 million
were made to us to satisfy in full all pending and future repurchase requests with those specific originators. We
applied the full amount during the second quarter of 2012 to the allowance for loan losses, resulting in a
corresponding reduction to net charge-offs as well as our provision for loan losses. Approximately $41.7 million
of loans were repurchased by or settled with the original sellers for the year ended December 31, 2012. A total of
$408.5 million of loans were repurchased by the original sellers, including global settlements, since we actively
started reviewing our purchased loan portfolio beginning in 2008.

Interest Rate Risk Management

Interest rate risks are monitored and managed by the ALCO, including the analysis of earnings 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.

Liquidity Risk Management

Liquidity risk is monitored by the ALCO. We have in place a comprehensive set of liquidity and funding
policies as well as contingency funding plans 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.

Market Risk Management

Market risks are monitored through a sub-committee of the ALCO. These risks include holding positions
associated with principal trading transactions in our market making business, reduced spreads in securities
pricing, and in our limited securities underwriting activities. See Item 7A. Quantitative and Qualitative
Disclosures about Market Risk for additional information about our market risks.

Operational Risk Management

Operational risks exist in most areas of the Company from processing a transaction to customer service. We
are also exposed to fraud risk 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.

The failure of a third party vendor to adequately meet its responsibilities which could result in financial loss
and impact our reputation is another significant operational risk. The Vendor Management group regularly
reports to the ERMC and monitors our vendor relationships. The vendor risk identification process includes
reviews of contracts, financial soundness of providers,
information security, business continuity and risk
management scoring.

Strategic Risk Management

Strategic risks are reviewed, challenged and monitored by various risk committees, the ERMC and Board
committees. These risks include potential loss of customers or adverse changes in customer mix in the brokerage

business, including trading activity as well as income from related businesses, including market making,
securities lending and margin lending; turmoil in the global financial markets which could reduce trade volumes
and margin borrowing and increase our dependence on our more active customers who receive lower pricing; and
new entrants into the discount brokerage market which could put pressure on margins and thus reduce revenues.

Reputational Risk Management

Reputational risks are reviewed, challenged and monitored by various risk committees and the ERMC. We
recognize that reputational risk can manifest itself in all areas of our business often in conjunction with other risk
types. We acknowledge that there is particular reputational risk from many factors including, but not limited to:

•

deterioration in the loan portfolios;

impact of investigations and lawsuits;

failure of controls supporting the accuracy of financial reports and disclosures;

risk of business disruption and system failures;

risk of security breaches and identity theft; and

risk of public regulatory findings.

Legal, Regulatory and Compliance Risk Management

Legal, regulatory and compliance risks are reviewed, challenged and monitored by various risk committees
and the ERMC. We recognize that legal, regulatory and compliance risks can manifest in all areas of our
business. Particularly pertinent risks include extensive government regulation, including banking and securities
rules and regulations, which could restrict our business practices; recently enacted regulatory reform legislation
which may have a material impact on our operations; and investigations and lawsuits. 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; not complying with applicable securities and banking laws, rules and
regulations, either domestically or internationally could subject us to disciplinary actions, damages, penalties or
restrictions that could significantly harm our business; and not maintaining the capital levels required by
regulators could subject us to prompt correction actions, increasingly strong sanctions, cease-and-desist orders,
and ultimately FDIC receivership.

These risks also arise in situations where the laws or rules governing certain regulated products or activities
may be ambiguous, untested, or in the process of significant change or revision. This risk exposes us to fines,
civil money penalties, payment of damages, and the voiding of contracts. It can lead to diminished reputation,
reduced franchise value, limited business opportunities, reduced expansion potential, and an inability to enforce
contracts.

CONCENTRATIONS OF CREDIT RISK

Loans

loan type, estimated current

We track and review factors to predict and monitor credit risk in the mortgage loan portfolio on an ongoing
basis. These factors include:
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. These 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 at least a
quarterly 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 15% of the home equity portfolio
was in the first lien position as of December 31, 2012. 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 approximately 21% of
home equity installment loans and approximately 79% of 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 five to ten years. At December 31, 2012, 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 80% 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, 2012:

Period of Conversion to Amortizing Loan

Already amortizing
Year ending December 31, 2013
Year ending December 31, 2014
Year ending December 31, 2015
Year ending December 31, 2016
Year ending December 31, 2017

% of Home Equity Line of
Credit Portfolio

9%
4%
7%
26%
41%
13%

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%

One- to Four-Family

December 31,

Home Equity

December 31,

2012

2011

2012

2011

$1,324.2
1,404.4
1,231.5
1,482.1

$1,596.3
1,716.8
1,527.3
1,775.4

$ 927.5
776.2
932.0
1,587.7

$1,168.9
967.9
1,191.9
2,000.0

Total mortgage loans receivable

$5,442.2

$6,615.8

$4,223.4

$5,328.7

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

108.1%
71.2%

106.7%
71.0%

113.8%
79.4%

112.1%
79.2%

(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 and the maximum available
line for home equity lines of credit, 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,

2012

2011

2012

2011

$2,317.9
3,124.3

$2,845.6
3,770.2

$2,166.5
2,056.9

$2,699.2
2,629.5

Total mortgage loans receivable

$5,442.2

$6,615.8

$4,223.4

$5,328.7

Current FICO (1)

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

One- to Four-Family

December 31,

Home Equity

December 31,

2012

2011

2012

2011

$2,819.5
498.1
425.5
347.2
494.0
857.9

$3,557.6
585.2
448.6
385.0
525.9
1,113.5

$2,238.3
417.9
345.8
279.7
370.3
571.4

$2,780.2
497.7
408.8
325.8
447.9
868.3

Total mortgage loans receivable

$5,442.2

$6,615.8

$4,223.4

$5,328.7

(1)

FICO scores are updated on a quarterly basis; however, as of December 31, 2012 and 2011, there were some loans for which the updated
FICO scores were not available. The current FICO distribution as of December 31, 2012 included original FICO scores for
approximately $121 million and $20 million of one- to four-family and home equity loans, respectively. 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.

Acquisition Channel

Purchased from a third party
Originated by the Company

One- to Four-Family

December 31,

Home Equity

December 31,

2012

2011

2012

2011

$4,484.3
957.9

$5,420.8
1,195.0

$3,723.2
500.2

$4,669.6
659.1

Total mortgage loans receivable

$5,442.2

$6,615.8

$4,223.4

$5,328.7

Vintage Year

2003 and prior
2004
2005
2006
2007
2008

One- to Four-Family

December 31,

Home Equity

December 31,

2012

2011

2012

2011

$ 190.4
514.3
1,095.1
2,123.4
1,515.0
4.0

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

$ 218.2
359.7
1,131.3
1,962.9
542.2
9.1

$ 302.6
472.9
1,387.0
2,480.0
674.8
11.4

Total mortgage loans receivable

$5,442.2

$6,615.8

$4,223.4

$5,328.7

Average age of mortgage loans receivable (years)

6.7

5.7

6.9

5.9

Geographic Location

California
New York
Florida
Virginia
Other states

Total mortgage loans receivable

One- to Four-Family

December 31,

Home Equity

December 31,

2012

2011

2012

2011

$2,568.7
386.4
368.3
235.0
1,883.8

$3,096.0
488.2
458.2
280.8
2,292.6

$1,333.3
313.1
298.9
192.1
2,086.0

$1,690.3
387.0
377.8
234.1
2,639.5

$5,442.2

$6,615.8

$4,223.4

$5,328.7

Approximately 40% of

the Company’s real estate loans were concentrated in California at both
December 31, 2012 and 2011. No other state had concentrations of real estate loans that represented 10% or more
of the Company’s real estate portfolio.

Additionally, in the current and anticipated interest rate environment, we do not expect interest rate resets to
be a material driver of credit costs in the near future. As of December 31, 2012, a total of $2.6 billion of one- to
four-family loans had already reset for the first time and another $2.3 billion were expected to reset for the first
time in the next five years. We expect approximately $2.5 billion in one- to four-family loans that have already
reset to experience another interest rate reset in 2013. We estimate that less than 1% of all one- to four-family
loans expected to reset in 2013 will experience a payment increase of more than 10% and nearly 83% are
expected to reset to a lower payment in 2013. The following table outlines the percentage of one- to four-family
loans that have reset and are expected to reset for the first time as of December 31, 2012:

Period of First Interest Rate Reset

Already reset
Year ending December 31, 2013
Year ending December 31, 2014
Year ending December 31, 2015
Year ending December 31, 2016
Year ending December 31, 2017

% of Total One-to Four-Family
First Resets

53 %
3 %
5 %
5 %
15 %
19 %

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, 2012
December 31, 2011

Allowance

$183.9
$314.2

Allowance as
a % of Loans
Receivable(1) Allowance

Allowance as
a % of Loans
Receivable(1)

3.37%
4.73%

$257.3
$463.3

6.04%
8.60%

$39.5
$45.3

4.62%
4.02%

$480.7
$822.8

4.54%
6.25%

(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, 2012, the allowance for loan losses decreased by $342.1 million from
the level at December 31, 2011. During the first quarter of 2012, we completed an evaluation of certain programs
and practices that were designed in accordance with guidance from our former regulator, the OTS. This
evaluation was initiated in connection with our transition from the OTS to the OCC, our new primary banking
regulator. As a result of our evaluation, loan modification policies and procedures were aligned with the guidance
from the OCC. The review resulted in a significant increase in charge-offs during the first quarter of 2012. The
majority of the losses associated with these charge-offs were previously reflected in the specific valuation
allowance and qualitative component of the general allowance for loan losses. 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. The following table shows the trend of the ratio of the general
allowance for loan losses, excluding the qualitative component, to loans that are 90+ days delinquent excluding
modified TDRs (dollars in millions):

December 31, 2012
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011

Troubled Debt Restructurings

Total 90+ Days
Delinquent
Loans, Excluding
Modified TDRs

General
Allowance for
Loan Losses

Coverage
Ratio

$348.7
$383.3
$432.6
$520.9
$595.9

$265.2
$276.5
$290.4
$326.6
$378.6

76%
72%
67%
63%
64%

TDRs include loan modifications completed under our programs that

involve granting an economic
concession to a borrower experiencing financial difficulty. Beginning in the fourth quarter of 2012, loans that
have been charged-off based on the estimated current value of the underlying property less estimated selling
costs due to bankruptcy notification are also considered TDRs. As of December 31, 2012, we had $216.6 million
net investment of TDRs that had been charged-off due to bankruptcy notification, $119.2 million of which were
classified as performing.

The following table shows the TDRs by delinquency category as of December 31, 2012 and 2011 (dollars in

millions):

December 31, 2012
One- to four-family
Home equity

Total

December 31, 2011
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

$ 927.6
231.9

$1,159.5

$ 767.3
351.6

$1,118.9

$118.8
17.6

$136.4

$ 88.2
51.4

$139.6

$48.6
7.9

$56.5

$33.2
34.5

$67.7

$134.1
19.6

$153.7

$ 84.3
8.4

$ 92.7

$1,229.1
277.0

$1,506.1

$ 973.0
445.9

$1,418.9

TDRs on accrual status, which are current and have made six or more consecutive payments, were $980.2

million and $795.3 million at December 31, 2012 and 2011, respectively.

Troubled Debt Restructurings – Loan Modifications

Historically, we reported the average re-delinquency rates for TDR loan modifications twelve months after
the modification occurred as this metric was a key indication of the effectiveness of our modification programs.

As a result of an overall decline in delinquent loans and the elimination of certain modification programs in the
first quarter of 2012, modification volumes have decreased significantly in 2012. While the re-delinquency rates
twelve months after modification have remained stable, this metric has become less meaningful as the vast
majority of our modifications are beyond twelve months since modification date. Therefore, we have ceased
using this measure as a key indicator of TDR performance. The overall delinquency status of TDR loan
modifications is now the primary measure we use to evaluate the performance. The following table shows TDR
loan modifications by delinquency category as of December 31, 2012 and 2011 (dollars in millions):

December 31, 2012
One- to four-family
Home equity

Total

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

Total

Modifications
Current

Modifications
30-89 Days
Delinquent

Modifications
90-179 Days
Delinquent

Modifications
180+ Days
Delinquent

Total Recorded
Investment in
Modifications

$ 838.0
195.0

$1,033.0

$ 767.3
351.6

$1,118.9

$105.2
15.1

$120.3

$ 88.2
51.4

$139.6

$43.9
6.2

$50.1

$33.2
34.5

$67.7

$79.1
7.1

$86.2

$84.3
8.4

$92.7

$1,066.2
223.4

$1,289.6

$ 973.0
445.9

$1,418.9

Included in allowance for loan losses was a specific valuation allowance of $171.4 million and $320.1
million that was established for modifications at December 31, 2012 and 2011, respectively. The specific
valuation 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 TDR loan
modifications and the specific valuation allowance by loan portfolio as well as the percentage of total expected
losses as of December 31, 2012 and 2011 (dollars in millions):

Recorded
Investment in
Modifications
before Charge-
offs

Recorded
Investment in
Modifications

Specific
Valuation
Allowance

Net Investment in
Modifications

Specific Valuation
Allowance as a %
of Modifications

Total
Expected
Losses

Charge-offs

December 31, 2012
One- to four-family
Home equity

$1,383.3
382.6

$(317.1)
(159.2)

$1,066.2
223.4

$ (89.7)
(81.7)

$ 976.5
141.7

Total

$1,765.9

$(476.3)

$1,289.6

$(171.4)

$1,118.2

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

$1,209.4
490.4

$(236.4)
(44.5)

$ 973.0
445.9

$(101.2)
(218.9)

$ 871.8
227.0

Total

$1,699.8

$(280.9)

$1,418.9

$(320.1)

$1,098.8

8%
37%

13%

10%
49%

23%

29%
63%

37%

28%
55%

35%

The recorded investment in TDR loan modifications 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 modified loans that were delinquent in excess of 180 days or in bankruptcy and on
TDRs when certain characteristics of the loan, including CLTV, borrower’s credit and type of modification, cast
substantial doubt on the borrower’s ability to repay the loan. The total expected loss on TDR loan modifications
includes both the previously recorded charge-offs and the specific valuation allowance. Total expected losses on
TDR loan modifications increased slightly from 35% at December 31, 2011 to 37% at December 31, 2012.

Net Charge-offs

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,

2012

2011

2010

2009

2008

$ 822.8
354.6

$1,031.2
440.6

$1,182.7
779.4

$ 1,080.6
1,498.1

508.2
1,583.7

(189.9)
(517.2)
(51.1)

(228.9)
(457.3)
(59.3)

(302.6)
(600.0)
(80.3)

(364.3)
(966.3)
(111.6)

(138.0)
(820.2)
(84.8)

(758.2)

(745.5)

(982.9)

(1,442.2)

(1,043.0)

9.3
40.2
12.0

61.5

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

Net charge-offs

(696.7)

(649.0)

(930.9)

(1,396.0)

(1,011.3)

Allowance for loan losses, end of period

$ 480.7

$ 822.8 $1,031.2

$ 1,182.7

$ 1,080.6

Net charge-offs to average loans receivable outstanding

5.80%

4.42%

5.10%

6.04%

3.64%

The following table allocates the allowance for loan losses by loan category for the past five years (dollars

in millions):

2012

2011

December 31,

2010

2009

2008

Amount %(1)

One- to four-family
Home equity
Consumer and other

$183.9
257.3
39.5

51.8% $314.2
463.3
40.2
45.3
8.0

50.7% $ 389.6
576.1
40.8
65.5
8.5

51.0%$ 489.9
620.0
40.0
72.8
9.0

52.4%$ 185.2
833.8
38.5
61.6
9.1

51.3%
39.6
9.1

Total allowance for

loan losses

$480.7

100.0% $822.8

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

(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. TDRs are charged-off when they are identified as collateral dependent based on the terms
of the modification, which includes assigning a higher level of risk to loans in which the LTV or CLTV is greater
than 110%, a borrower’s credit score is less than 600 and certain types of modifications, such as interest-only
payments and terms longer than 30 years. 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, 2012 compared to 2011 increased by $47.7 million. The
timing and magnitude of charge-offs are affected by many factors and we anticipate variability from quarter to
quarter while continuing to see a downward trend over the long term.

During the first quarter of 2012 we completed an evaluation of certain programs and practices that were
designed in accordance with guidance from our former regulator, the OTS. This evaluation was initiated in
connection with our transition from the OTS to the OCC, our new primary banking regulator. As a result of our
evaluation, loan modification policies and procedures were aligned with the guidance from the OCC. The review
resulted in a significant increase in charge-offs during the first quarter of 2012.

We utilize third party loan servicers to obtain bankruptcy data on our borrowers and during the third quarter
of 2012, we identified an increase in bankruptcies reported by one specific servicer. In researching this increase,
we discovered that the servicer had not been reporting historical bankruptcy data on a timely basis. As a result,
we implemented an enhanced procedure around all servicer reporting to corroborate bankruptcy reporting with
independent third party data. Through this additional process, approximately $90 million of loans were identified
in which servicers failed to report the bankruptcy filing to us, approximately 90% of which were current at the
end of the third quarter of 2012. As a result, these loans were written down to the estimated current value of the
underlying property less estimated selling costs, or approximately $40 million, during the third quarter of 2012.
These newly identified bankruptcy filings resulted in an increase to net charge-offs and provision for loan losses
of $50 million for the year ended December 31, 2012, with approximately 80% related to prior years.

Nonperforming Assets

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

One- to four-family
Home equity
Consumer and other

Total nonperforming loans
REO and other repossessed assets, net

December 31,

2012

2011

2010

2009

2008

$ 639.1
247.5
6.4

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

893.0
71.2

1,216.1
87.6

1,622.5
133.5

1,772.8
115.7

942.1
108.1

Total nonperforming assets, net

$ 964.2

$ 1,303.7

$ 1,756.0

$ 1,888.5

$1,050.2

Nonperforming loans receivable as a percentage of

gross loans receivable

8.44%

9.24%

10.04%

8.71%

3.69%

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

28.77%

33.78%

31.01%

36.67% 31.22%

of home equity nonperforming loans

103.96% 164.64% 159.67% 144.15% 244.34%

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

617.19% 1000.46% 1194.56% 1082.29% 790.72%

nonperforming loans

53.83%

67.66%

63.56%

66.73% 114.70%

During the year ended December 31, 2012, nonperforming assets, net decreased $339.5 million to $964.2
million when compared to December 31, 2011. This decrease was due to both improving credit trends and the
additional charge-offs recorded as a result of the completion of the evaluation of certain programs and practices
that were designed in accordance with guidance from our former regulator, the OTS. This evaluation was
initiated in connection with our transition from the OTS to the OCC, our new primary banking regulator. As a

result of our evaluation, loan modification policies and procedures were aligned with the guidance from the
OCC. The review resulted in a significant increase in charge-offs during the first quarter of 2012, which also
decreased the loans receivable balance. This decrease was partially offset by the additional second lien home
equity loans placed on nonaccrual status during the second quarter of 2012.

During the first quarter of 2012, interagency supervisory guidance related to practices associated with loans
and lines of credit secured by junior liens on one- to four-family residential properties was issued. The guidance
indicated that if a senior lien is delinquent, it should be considered in determining the income recognition of the
junior lien. The vast majority of our home equity loans were purchased in the secondary market; therefore, we
hold both the first and second lien positions in less than 1% of the home equity loan portfolio. We do not directly
service our loans and as a result, rely on third party vendors and servicers to provide information on the home
equity portfolio, including data on the first lien positions related to second lien home equity loans. During the
second quarter of 2012, we engaged additional third parties in order to receive expanded information on the lien
senior to the borrower’s junior lien, including delinquency and modification status. As a result, approximately
$180 million of unpaid principal balance, or approximately 4% of performing second lien home equity loans,
were placed on nonaccrual status as a result of the interagency supervisory guidance during the second quarter of
2012.

During the year ended December 31, 2012, we recognized $22.1 million of operating interest income on
loans that were nonperforming at December 31, 2012. If our nonperforming loans at December 31, 2012 had
been performing in accordance with their terms, we would have recorded additional operating interest income of
approximately $30.0 million for the year ended December 31, 2012. At December 31, 2012 there were no
commitments to lend additional funds to any of these borrowers.

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 or are
modifications that have substantial doubt as to the borrower’s ability to repay the loan). We believe loans
delinquent 90 to 179 days are 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,

2012

2011

$ 94.7
64.2
6.2

$136.2
99.7
4.1

$165.1

$240.0

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

1.56%

1.82%

(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.

One- to four-family loans delinquent 90-179 days declined $41.5 million to $94.7 million and home equity
loans delinquent 90-179 days declined $35.5 million to $64.2 million due to both improving credit trends and the
additional charge-offs recorded as a result of the completion of the evaluation of certain programs and practices,
as previously discussed. The review resulted in a significant increase in charge-offs during the first quarter of
2012, which also decreased the loans receivable balance.

In addition to nonperforming assets, we monitor loans in which a borrower’s current 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,

2012

2011

$233.8
89.3
19.1

$294.8
154.6
17.7

$342.2

$467.1

Special mention loans receivable as a percentage of gross loans receivable

3.23%

3.55%

(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 is generally indicative of the expected trend for charge-offs in
future periods, as these loans have a greater propensity to migrate into nonaccrual status and ultimately charge-
off. One- to four-family loans are generally secured in a first lien position by real estate assets, reducing the
potential loss when compared to an unsecured loan. Home equity loans are generally secured by real estate
assets; however, the majority of these loans are secured in a second lien position, which substantially increases
the potential loss when compared to a first lien position. The loss severity of our second lien home equity loans is
approximately 95%.

During the year ended December 31, 2012, special mention loans decreased by $124.9 million to $342.2
million and are down 67% from their peak of $1.0 billion as of December 31, 2008. This decrease was largely
due to both improving credit trends and the additional charge-offs recorded as a result of the completion of the
evaluation of certain programs and practices, as previously discussed. The review resulted in a significant
increase in charge-offs during the first quarter of 2012, which also decreased the loans receivable balance. 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.

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 non-agency debt securities, municipal bonds and corporate bonds by average
credit ratings and type of asset as of December 31, 2012 and 2011 (dollars in millions):

December 31, 2012

Non-agency CMOs
Municipal bonds and corporate bonds

Total

AAA

$ 3.9
10.3

$14.2

$ 3.0
19.9

$22.9

$ 7.4
—

$ 7.4

BBB

$ 8.2
5.5

$13.7

December 31, 2011

Non-agency CMOs
Municipal bonds and corporate bonds

Total

AAA

$ 5.6
10.3

$15.9

$ 9.9
20.0

$29.9

$ 8.0
8.0

$16.0

BBB

$16.1
9.5

$25.6

Below
Investment
Grade and
Non-Rated

$237.6
—

$237.6

Below
Investment
Grade and
Non-Rated

$383.0
19.9

$402.9

Total

$260.1
35.7

$295.8

Total

$422.6
67.7

$490.3

We also held $22.5 billion and $21.1 billion of agency mortgage-backed securities and CMOs, agency
debentures and agency debt securities at December 31, 2012 and 2011, respectively. We consider securities
backed by the U.S. government or its agencies to have low credit risk as the long-term debt rating of the U.S.
government is AA+ by S&P and AAA by Moody’s and Fitch.

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, 2012, we
held approximately $179.9 million in amortized cost of non-agency CMOs that had been other-than-temporarily
impaired. We recorded $16.9 million, $14.9 million and $37.7 million of net impairment for the years ended
December 31, 2012, 2011 and 2010, 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 that affect the amounts reported in the consolidated financial statements and related
notes for the periods presented. 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 and actual results could differ from our estimates.

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, 2012, the allowance for loan losses was
$480.7 million on $10.5 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. 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, 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 develop the forecast of
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 delinquency and loss at the product level. The one- to four-family and home
equity loan portfolios represented 52% and 40%, respectively, of total loans receivable as of December 31, 2012.
The consumer and other loan portfolio represented 8% of total loans receivable as of December 31, 2012.

The general allowance for loan losses also included a qualitative component to account for a variety of
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 factors are: external factors, such as changes in the macro-economic,
legal and regulatory environment; internal factors, such as procedural changes and reliance on third parties; and
portfolio specific factors, such as the impact of payment resets and historical loan modification activity, which
impacts the historical performance data used to forecast delinquency and default in the general allowance for
loan losses.

The total qualitative component was $44 million and $124 million as of December 31, 2012 and 2011,
respectively. The qualitative component for the one- to four-family and home equity loan portfolios was 17% and
35% of the general allowance for loan losses at December 31, 2012 and 2011, respectively. The decrease in the
qualitative reserve in these loan portfolios from December 31, 2011 to December 31, 2012 reflects the
completion of our evaluation of certain programs and practices that were designed in accordance with guidance
from our former regulator, the OTS. This evaluation was initiated in connection with the transition from the OTS
to the OCC. As a result of the evaluation, loan modification policies and procedures were aligned with the
guidance from the OCC. The qualitative component was increased to 35% during the fourth quarter of 2011 to
reflect additional estimated losses due to this evaluation. The review resulted in a significant increase in charge-
offs during the year ended December 31, 2012 and a corresponding decrease in the qualitative component. The
qualitative component for the consumer and other loan portfolio was 17% and 15% of the general allowance at
December 31, 2012 and 2011, respectively.

For modified loans accounted for as TDRs that are valued using the discounted cash flow model, 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. Specifically, a loan that has a more severe delinquency history prior to
modification will have a higher future default rate in the discounted cash flow analysis than a loan that was not as
severely delinquent. For both of the one- to four-family and home equity loan portfolio segments, the pre-
modification delinquency status, the borrower’s current credit score and other credit bureau attributes, in addition
to each loan’s individual default experience and credit characteristics, are incorporated into the calculation of 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 results of
operations in future periods.

During the normal course of conducting examinations, our banking regulators, the OCC and Federal
Reserve, continue to review our business and practices. This process is dynamic and ongoing and we cannot be
certain that additional changes or actions will not result from their continuing review.

Valuation of Goodwill and Other Intangible Assets

Description

Goodwill and other intangible assets are evaluated for impairment on at least an annual basis or when events
or changes indicate the carrying value may not be recoverable. Goodwill and other intangible assets net of
amortization were $1.9 billion and $0.3 billion, respectively, at December 31, 2012.

Judgments

Estimating the fair value of reporting units and the assets, liabilities and intangible assets of a reporting unit
is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the
appropriate discount rates and an applicable control premium. Management judgment is required to assess
whether the carrying value of the reporting unit can be supported by the fair value of the individual reporting
unit. There are various valuation methodologies, such as the market approach or discounted cash flow methods,
that may be used to estimate the fair value of reporting units. In applying these methodologies, we utilize a
number of factors, including actual operating results, future business plans, economic projections, and market
data.

Goodwill is allocated to reporting units, which are components of the business that are one level below
operating segments. Each reporting unit is tested for impairment individually during the annual evaluation. In
conducting the goodwill impairment test for 2012, we determined the fair value of our reporting units using both
a discounted cash flow analysis, a form of the income approach, and the publicly traded company method, a form
of the market approach, combined with a control premium. The discounted cash flow analysis required
management to make projections about future revenue and costs, discounting the cash flows to present value
using a risk-adjusted discount rate. The publicly traded company method consisted of identifying similar publicly
traded companies. Based on the results of step one of the goodwill impairment test, we determined that the fair
value of each of the reporting units, including goodwill, exceeded the carrying value for each reporting unit. As
such, none of the reporting units were impaired at December 31, 2012.

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 and the fair value as a percentage of
book value for the reporting units in the trading and investing segment (dollars in millions):

Reporting Unit

Retail Brokerage
Market Making

Total goodwill

December 31, 2012

% of Fair Value to
Book Value

190%
115%

Goodwill

$1,791.8
142.4

$1,934.2

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. Other intangible assets have
a weighted average remaining useful life of 13 years. We did not recognize impairment on our other intangible
assets in the periods presented.

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 estimated future cash flows and company comparisons. If actual cash flows are less than
estimated future cash flows used in the annual assessment, then goodwill would have to be tested for impairment.

The estimated fair value of the market making reporting unit as a percentage of book value was
approximately 115%; therefore, if actual cash flows are less than our estimated cash flows, goodwill impairment
could occur in the market making reporting unit in the future. These cash flows will be monitored closely to
determine if a further evaluation of potential impairment is necessary so that impairment could be recognized in a
timely manner. In addition, following the review of order handling practices and pricing for order flow between
E*TRADE Securities LLC and GI Execution Services, LLC, our regulators may initiate investigations into our
historical practices which could subject us to monetary penalties and cease-and-desist orders, which could also
prompt claims by customers of E*TRADE Securities LLC. Any of these actions could materially and adversely
affect our market making and trade execution businesses, which could impact future cash flows and could result
in goodwill impairment.

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.

Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowance

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, 2012 we had net deferred tax assets of $1,416.2 million, net
of a valuation allowance (on state, foreign country and charitable contribution deferred tax assets) of $97.8 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 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 deferred tax assets. We are 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 we were to conclude that a valuation allowance was required, the resulting loss could have a
material adverse effect on our financial condition and results of operations. For the three-year period ended
December 31, 2012, we were no longer in a cumulative book loss position. As of December 31, 2012, we did not
establish a valuation allowance against federal deferred tax assets as we believe that it is more likely than not that
all of these assets will be realized. Approximately half 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 within the next six years.

Our evaluation of the need of 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 nine
years, including through uncertain economic and regulatory environments. The core business is driven by
brokerage customer activity and includes trading, brokerage cash, margin lending, retirement and 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.

We maintain a valuation allowance for certain of our state deferred tax assets as we have concluded that it is
more likely than not that they will not be realized. At December 31, 2012, we had state deferred tax assets of
approximately $136.5 million that related to our state net operating loss carry forwards and temporary differences
with a valuation allowance of $52.2 million against such deferred tax assets.

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, 2012, the available-for-sale and
held-to-maturity securities portfolios consisted of debt securities, the majority of which were agency 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 as of the balance sheet date; 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, 2012, we recognized $16.9 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, 2012 were other-than-temporarily impaired and the gross
OTTI was recorded through earnings, we would have recorded a pre-tax loss of $54.7 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, 2012, we had an unrealized pre-tax loss reported in accumulated other comprehensive loss of
$718.0 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, 2012, 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 $579.8
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

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. As of December 31, 2012, 29% and 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—Unadjusted quoted prices in active markets for identical assets or liabilities that are

accessible by the Company.

• Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable,

either directly or indirectly.

• Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities.

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, 2012. 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 and income
approaches with 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. As of December 31,
2012, the non-agency CMOs were categorized in Level 2 and Level 3 of the fair value hierarchy.

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, 2012, 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.

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

37
88

90
91

89
89
89

76
77
112
78

75
75

37
150
150
38
92

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):

2012 Compared to 2011
Increase (Decrease) Due To

2011 Compared to 2010
Increase (Decrease) Due To

Volume

Rate

Total

Volume

Rate

Total

Enterprise interest-earning assets:

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

$(116.2) $ (79.5) $(195.7) $(170.5) $(16.4) $(186.9)
35.0
101.0
21.4
(2.2)
(1.0)
19.4

(61.4)
100.1
(5.6)
0.4
(0.2)
(0.1)

(2.5)
121.7
3.9
0.1
—
(3.5)

57.4
101.3
35.4
(1.6)
0.1
(1.9)

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

(58.9)
(21.6)
(9.5)
0.3
(0.2)
3.4

Total enterprise interest-earning assets(2)

3.5

(166.0)

(162.5)

20.2

(33.5)

(13.3)

Enterprise interest-bearing liabilities:

Deposits
Customer payables
Securities sold under agreements to repurchase
FHLB advances and other borrowings
Securities loaned and other

Total enterprise interest-bearing liabilities

3.7
0.3
(19.4)
(10.5)
0.1

(25.8)

(22.4)
1.5
24.8
(3.1)
(1.3)

(0.5)

(18.7)
1.8
5.4
(13.6)
(1.2)

(26.3)

(0.3)
1.2
(16.9)
(0.5)
—

(16.5)

(19.7)
0.4
40.4
(12.6)
(0.1)

8.4

(20.0)
1.6
23.5
(13.1)
(0.1)

(8.1)

Change in enterprise net interest

income

$ 29.3

$(165.5) $(136.2) $ 36.7

$(41.9) $ (5.2)

(1) Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual 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.
(2) Amount includes a taxable equivalent increase in operating interest income of $1.1 million, $1.2 million and $1.2 million for years ended

December 31, 2012, 2011 and 2010, respectively.

Lending Activities

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

millions):

2012

2011

2010

2009

2008

Balance %

Balance % Balance %

Balance %

December 31,

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

$ 5,442.2
4,223.4
844.9

51.8%$ 6,615.8
5,328.7
40.2
1,113.2
8.0

50.7%$ 8,170.3
6,410.3
40.8
1,443.4
8.5

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%
39.6
9.1

Total loans receivable

10,510.5 100.0% 13,057.7 100.0% 16,024.0 100.0% 20,178.1 100.0% 25,295.6 100.0%

Adjustments:

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

Total adjustments

68.9
(480.7)

(411.8)

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)

Loans receivable, net $10,098.7

$12,332.8

$15,121.9

$19,167.0

$24,451.8

The following table shows the contractual maturities of the loan portfolio at December 31, 2012, 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

$124.5
188.4
111.6

$ 553.1
854.0
320.3

$4,764.6
3,181.0
413.0

$ 5,442.2
4,223.4
844.9

$424.5

$1,727.4

$8,358.6

$10,510.5

(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, 2012 (dollars in millions):

One- to four-family
Home equity
Consumer and other

Total loans receivable

Securities

Interest Rate Type

Fixed

Adjustable

Total

$1,142.4
840.2
726.1

$4,175.3
3,194.8
7.2

$ 5,317.7
4,035.0
733.3

$2,708.7

$7,377.3

$10,086.0

Our portfolio of mortgage-backed and investment securities is classified into three categories: trading,

available-for-sale or held-to-maturity.

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 the investment securities portfolio is composed of agency debt securities guaranteed by the
Small Business Administration and agency debentures which are unsecured senior debt offered by Fannie Mae,
Freddie Mac and other government agencies.

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):

2012

December 31,

2011

2010

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:

Agency debentures
Agency debt securities
Municipal bonds
Corporate bonds

$11,881.2 $12,097.2 $13,772.1 $13,965.7 $13,017.8 $12,898.1
395.4

260.1

235.2

341.6

490.3

422.6

12,141.3

12,332.4

14,194.7

14,307.3

13,508.1

13,293.5

516.0
525.4
30.2
5.5

528.0
546.8
31.3
4.5

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

Total investment securities

1,077.1

1,110.6

1,352.0

1,344.2

1,579.8

1,512.2

Total available-for-sale securities

$13,218.4 $13,443.0 $15,546.7 $15,651.5 $15,087.9 $14,805.7

Held-to-maturity securities:

Residential mortgage-backed securities:
Agency mortgage-backed securities

and CMOs
Investment securities:

Agency debentures
Agency debt securities

Total investment securities

$ 7,887.5 $ 8,182.1 $ 5,296.5 $ 5,458.0 $ 1,928.6 $ 1,897.0

163.4
1,489.0

169.8
1,558.6

1,652.4

1,728.4

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

$ 9,539.9 $ 9,910.5 $ 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, 2012 (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:
Agency debentures
Agency debt securities
Municipal bonds(1)
Corporate bonds

Total investment
securities

Total available-for-sale

$—
—

—
—

$ 66.6
—

3.59% $ 635.2
—
—

2.35% $11,179.4
260.1
—

3.31% $11,881.2
260.1
3.18%

3.26%
3.18%

—

—
—
—
—

—

—
—
—
—

66.6

—
—
—
—

—

—
—
—
—

635.2

32.0
406.1
—
—

438.1

11,439.5

12,141.3

5.18%
3.02%
—
—

484.0
119.3
30.2
5.5

639.0

3.08%
2.79%
4.80%
0.81%

516.0
525.4
30.2
5.5

3.19%
2.97%
4.80%
0.81%

1,077.1

securities

$—

$ 66.6

$1,073.3

$12,078.5

$13,218.4

Held-to-maturity securities:

Residential mortgage-backed

securities:
Agency mortgage-backed
securities and CMOs

Investment securities:
Agency debentures
Agency debt securities

Total investment
securities

Total held-to-maturity

securities

$—

—
—

—

$—

—

—
—

$159.1

2.62% $2,109.3

3.17% $ 5,619.1

3.52% $ 7,887.5

3.41%

163.4
0.1

2.00%
4.50%

—
786.4

—
3.01%

—
702.5

—
2.75%

163.4
1,489.0

2.00%
2.89%

163.5

786.4

702.5

1,652.4

$322.6

$2,895.7

$ 6,321.6

$ 9,539.9

(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, 2012, outstanding advances from the FHLB totaled
$920.0 million at interest rates ranging from 0.28% to 0.76% and at a weighted-average rate of 0.47%.

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):

Ending
Balance

Weighted-
Average Interest
Rate (1)

Maximum
Amount at
Month-End

Weighted-Average

Balance

Interest
Rate(2)

At or for the year ended December 31, 2012:

Securities sold under agreements to repurchase
FHLB advances and other borrowings (3)
At or for the year ended December 31, 2011:

Securities sold under agreements to repurchase
FHLB advances and other borrowings (3)
At or for the year ended December 31, 2010:

$4,454.7
$1,259.4

$5,015.5
$2,732.5

Securities sold under agreements to repurchase
FHLB advances and other borrowings (3)

$5,888.3
$2,731.4

0.70%
1.27%

0.95%
3.19%

0.63%
3.09%

$5,025.4
$2,744.1

$4,775.1
$2,464.9

3.32%
3.76%

$5,891.6
$2,759.7

$5,417.2
$2,741.1

2.83%
3.87%

$6,458.1
$3,102.1

$6,154.3
$2,754.3

2.11%
4.33%

(1) Weighted-average interest rates are based on ending balances and exclude hedging costs.
(2) Weighted-average interest rates are based on average balances and include hedging costs.
(3)

Excludes other borrowings of the parent company of $1.5 million, $4.4 million and $0.3 million at December 31, 2012, 2011 and 2010,
respectively, which do not generate operating interest expense. These liabilities generate corporate interest expense.

GLOSSARY OF TERMS

2009 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 12 1⁄ 2% springing lien notes due November
2017 and $0.4 billion principal amount of the 8% senior notes due June 2011, for an equal principal amount of
newly-issued non-interest-bearing convertible debentures due 2019.

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 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.

Brokerage account attrition rate—Attriting brokerage accounts, which are gross new brokerage accounts

less net new brokerage accounts, divided by total brokerage accounts at the previous period end.

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.

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—Depositors Insurance Fund.

Economic Value of Equity (“EVE”)—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.

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 (“ETFs”)—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.

Federal Reserve—Board of Governors of the Federal Reserve System.

FHLB—Federal Home Loan Bank.

FICO—Fair Isaac Credit Organization.

FINRA—Financial Industry Regulatory Authority.

Fixed charge coverage ratio—Net income 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.

Forex—A type of trade that involves buying one currency while simultaneously selling another. Currencies

are traded in pairs consisting of a “base currency” and a “quote currency.”

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.

Gross loans receivable—Includes unpaid principal balances and premiums (discounts).

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.

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 and greater past due, TDRs that
are on nonaccrual status for all classes of loans and certain junior liens that have a delinquent senior lien.

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 before other

income (expense),

income tax expense and discontinued

operations, if applicable.

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 or physical possession 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 current 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, as that is
not permitted under GAAP.

Tier 1 capital—Adjusted equity capital used in the calculation of capital adequacy ratios. Tier 1 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, and loans that have been charged-off due to bankruptcy
notification.

Wholesale borrowings—Borrowings that consist of securities sold under agreements to repurchase and

FHLB advances and other borrowings.

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.

Interest Rate Risk

Our exposure to interest rate risk is related primarily to interest-earning assets and interest-bearing
liabilities, the vast majority of which are held for non-trading purposes. The management of interest rate risk is
essential to profitability. The primary objective of the management of interest rate risk is to control exposure to
interest rates within the Board-approved limits, as outlined in the scenario analysis below, and with limited
exposure to earnings volatility resulting from interest rate fluctuations. Our general strategies to manage interest
rate risk include balancing variable-rate and fixed-rate assets and liabilities and utilizing derivatives in a way that
reduces overall exposure to changes in interest rates. 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 interest rate 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, 2012, 89% of our total assets were enterprise
interest-earning assets.

At December 31, 2012, approximately 63% 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
lower prepayments. The inverse is true in a falling rate
and mortgage-backed securities tend to exhibit
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 and the majority of FHLB advances re-price as agreements reset. Sweep
accounts, complete savings accounts and other money market and savings accounts re-price at management’s
discretion. Corporate debt has 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 in Note 6—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 Economic
Value of Equity (“EVE”) approach, the present value of all existing interest-earning assets, interest-bearing
liabilities, derivatives and forward commitments are estimated and then combined to produce an EVE figure. The
approach values only the current balance sheet in which the most significant assumptions are the prepayment
rates of the loan portfolio and mortgage-backed securities and the repricing of deposits. This approach does not
incorporate assumptions related to business growth, or liquidation and re-investment of instruments. This
approach provides an indicator of future earnings and capital levels because changes in EVE indicate the
anticipated change in the value of future cash flows. 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 change in EVE
amounts fluctuate based on the parallel shifts in interest rates primarily due to the change in timing of cash flows
in the Company’s residential loan and mortgage-backed securities portfolios. Expected prepayment rates on
residential mortgage loans and mortgage-backed securities increase as interest rates decline. In a rising interest
rate environment, expected prepayment rates decrease.

The EVE method is used at the E*TRADE Bank level and not for the Company. The ALCO monitors
E*TRADE Bank’s interest rate risk position. E*TRADE Bank had nearly 100% and 99% of enterprise interest-
earning assets at December 31, 2012 and 2011, respectively, and held 99% and 98% of enterprise interest-bearing
liabilities at December 31, 2012 and 2011, respectively. The sensitivity of EVE at December 31, 2012 and 2011
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(2) Amount Percentage(2) Board Limit

Change in EVE

December 31, 2012

December 31, 2011

+300
+200
+100
-100

$(446.3)
$(168.5)
$ 23.6
$(175.6)

(11.1)% $ (18.7)
(4.2)% $ 120.2
0.6% $ 153.6
(4.4)% $(324.0)

(0.5)%
3.4%
4.4%
(9.2)%

(25)%
(15)%
(10)%
(10)%

(1) On December 31, 2012 and 2011, the yield for the three-month treasury bill was 0.05% and 0.02%, respectively. As a result, the
requirements of the EVE model were temporarily modified, resulting in the removal of the minus 200 and 300 basis points scenarios for
the periods ended December 31, 2012 and 2011.
The percentage change represents the amount of change in EVE divided by the base EVE as calculated in the current interest rate
environment.

(2)

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 Company compares the parallel shift in interest rate
changes in EVE to the established board limits in order to assess the Company’s interest rate risk on a monthly
basis. In the event that the percentage change in EVE exceeds the board limits, E*TRADE Bank’s Chief Risk
Officer, Chief Financial Officer and Treasurer must all be promptly notified in writing and decide upon a plan of
remediation. In addition, E*TRADE Bank’s Board of Directors must be promptly notified of the exception and
the planned resolution.

Market Risk

Equity Securities 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, 2012, we held securities with a fair value of $101.3 million in long positions and $87.6 million in
short positions, for a net exposure of $13.7 million.

We are also indirectly exposed to equity securities risk in connection with securities collateralizing margin
receivables to customers, securities loaned to customers in our securities loaned programs and securities
borrowed from and lent to other broker-dealers. In order to manage equity securities risk, we may require
additional cash or collateral when necessary based upon the fair value of securities purchased on margin,
securities loaned or the underlying collateral for securities borrowed.

100

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, 2012. 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, 2012,
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.

101

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
(the “Company”) as of December 31, 2012, based on criteria established in Internal
subsidiaries
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.

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.

In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, 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, 2012 of the
Company and our report dated February 26, 2013 expressed an unqualified opinion on those consolidated
financial statements.

/s/ Deloitte & Touche LLP

McLean, Virginia
February 26, 2013

102

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, 2012 and 2011, 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, 2012. 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, 2012 and 2011, and the results
of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in
conformity with accounting principles generally accepted in the United States of America.

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, 2012, 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 26, 2013 expressed an unqualified
opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

McLean, Virginia
February 26, 2013

103

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:

Total operating expense

Income before other income (expense) and income tax expense (benefit)

Other income (expense):

Corporate interest income
Corporate interest expense
Gains on sales of investments, net
Gains (losses) on early extinguishment of debt
Equity in income (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

Year Ended December 31,

2012

2011

2010

$ 1,371,098
(286,033)

$ 1,532,339
(312,380)

$ 1,546,713
(320,430)

1,085,065

1,219,959

1,226,283

377,843
122,170
93,156
200,366
(19,799)

2,874

(16,925)
37,821

814,431

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

1,899,496

2,036,599

2,077,875

354,637

440,614

779,412

352,725
139,451
128,635
117,240
86,321
74,346
73,054
90,616
25,183
7,689
66,825

333,646
145,172
147,052
105,442
89,672
68,840
67,335
89,583
26,151
7,706
154,305

325,044
132,150
147,493
77,728
81,177
70,915
73,342
87,931
28,475
14,346
103,976

1,162,085
382,774

1,234,904
361,081

1,142,577
155,886

90
(179,877)
18
(335,261)
1,292

(513,738)
(130,964)
(18,381)

702
(177,829)
44
3,091
(1,759)

(175,751)
185,330
28,629

$ (112,583) $ 156,701

$
$

(0.39) $
(0.39) $

0.59
0.54

$
$

6,188
(167,130)
2,655
—
(740)

(159,027)
(3,141)
25,331

(28,472)

(0.13)
(0.13)

285,748
285,748

267,291
289,822

211,302
211,302

See accompanying notes to consolidated financial statements

104

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:

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

Cash flow hedging instruments:
Unrealized 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)

Year Ended December 31,

2012

2011

2010

$(112,583) $ 156,701

$(28,472)

12,285

5,709

25,662

(1,843)
186,348
(128,148)

3,589
268,405
(78,060)

(2,320)
74,826
(98,408)

68,642

199,643

(240)

(72,119)
77,731

(216,302)
66,847

(77,724)
47,774

5,612

2,447

(149,455)

(29,950)

1,823

(4,320)

76,701

52,011

(34,510)

$ (35,882) $ 208,712

$(62,982)

(1) Amounts are net of benefit from income taxes of $7.5 million, $3.5 million and $15.8 million for the years ended December 31, 2012,

2011 and 2010, respectively.

(2) Amounts are net of benefit from income taxes of $1.0 million, $2.1 million and $1.5 million for the years ended December 31, 2012,

2011 and 2010, respectively.

(3) Amounts are net of provision for income taxes of $111.6 million, $161.0 million and $48.7 million for the years ended December 31,

2012, 2011 and 2010, respectively.

(4) Amounts are net of provision for income taxes of $78.9 million, $46.3 million and $60.2 million for the years ended December 31, 2012,

2011 and 2010, respectively.

(5) Amounts are net of benefit from income taxes of $41.4 million, $133.9 million and $40.2 million for years ended December 31, 2012,

2011 and 2010, respectively.

(6) Amounts are net of benefit from income taxes of $51.9 million, $43.3 million and $26.4 million for the years ended December 31, 2012,

2011 and 2010, respectively.

See accompanying notes to the consolidated financial statements

105

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(In thousands, except share data)

ASSETS

Cash and equivalents
Cash 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 $2,372,197 and $3,916,927 at December 31, 2012 and
2011, respectively)

Held-to-maturity securities (fair value of $9,910,496 and $6,282,989 at

December 31, 2012 and 2011 respectively; includes securities pledged to
creditors with the right to sell or repledge of $2,944,714 and $2,092,570 at
December 31, 2012 and 2011, respectively)

Margin receivables
Loans receivable, net (net of allowance for loan losses of $480,751 and $822,816 at

December 31, 2012 and 2011, 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 19)

Shareholders’ equity:
Common stock, $0.01 par value, shares authorized: 400,000,000 at December 31,
2012 and 2011; shares issued and outstanding: 286,114,334 and 285,368,075 at
December 31, 2012 and 2011, respectively

Additional paid-in-capital (“APIC”)
Accumulated deficit
Accumulated other comprehensive loss

Total shareholders’ equity

Total liabilities and shareholders’ equity

December 31,

2012

2011

$ 2,761,494
376,898
101,270

$ 2,099,839
1,275,587
54,372

13,443,020

15,651,493

9,539,948
5,804,041

6,079,512
4,826,256

10,098,723
67,400
288,170
1,934,232
260,622
2,710,921

12,332,807
140,183
299,693
1,934,232
285,805
2,960,673

$47,386,739

$47,940,452

$28,392,552
4,454,661
4,964,922
1,260,916
1,764,982
1,644,236

$26,459,985
5,015,499
5,590,858
2,736,935
1,493,552
1,715,673

42,482,269

43,012,502

2,861
7,319,257
(2,107,720)
(309,928)

2,854
7,306,862
(1,995,137)
(386,629)

4,904,470

4,927,950

$47,386,739

$47,940,452

See accompanying notes to the consolidated financial statements

106

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In thousands)

Common Stock

Shares Amount

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Loss

Total
Shareholders’
Equity

Balance, December 31, 2009
Net loss
Other comprehensive loss
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

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

Balance, December 31, 2011
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
Other

189,397 $1,894 $6,275,157 $(2,123,366) $(404,130) $3,749,555
(28,472)
(34,510)
316,983

(28,472)
—
—

—
(34,510)
—

—
—
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)

220,841 $2,208 $6,640,715 $(2,151,838) $(438,640) $4,052,445
156,701
52,011
660,946

156,701
—
—

—
52,011
—

—
—
63,918

—
—
639

660,307

—
—

567
—
—

—
—

(2,882)

(5,719)
14,456
(15)

—

—
—
—

—

—
—
—

(2,881)

(5,713)
14,456
(15)

285,368 $2,854 $7,306,862 $(1,995,137) $(386,629) $4,927,950
(112,583)
76,701
355

—
—
34 —

—
76,701
—

—
—
355

(112,583)

—
—

2 —

(5,053)

710
—
—

—
—

(3,677)
20,764
6

—

—
—
—

—

—
—
—

(5,053)

(3,670)
20,764
6

Balance, December 31, 2012

286,114 $2,861 $7,319,257 $(2,107,720) $(309,928) $4,904,470

See accompanying notes to the consolidated financial statements

107

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 (used in)

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

on sales of investments, net

Equity in (income) 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:

Decrease (increase) in cash required to be segregated under

federal or other regulations

(Increase) decrease in margin receivables
(Decrease) increase in customer payables
Proceeds from sales of loans held-for-sale
Originations of loans held-for-sale
Net (increase) decrease in trading securities
Decrease in other assets
(Decrease) increase in other liabilities

Year Ended December 31,

2012

2011

2010

(112,583) $

156,701

(28,472)

354,637

440,614

779,412

409,561

340,691

339,085

(183,459)
(1,292)
134,548
20,764
(137,076)
(497)

898,689
(977,785)
(625,936)
342,696
(331,538)
(46,822)
265,082
(167,748)

(105,370)
1,759
(3,091)
14,456
7,895
4,806

(666,077)
294,319
570,772
123,441
(129,654)
16,874
32,787
(4,968)

(131,197)
740
—
25,361
(86,199)
(8,600)

823,626
(1,366,093)
136,525
154,603
(138,043)
(24,887)
369,720
203,714

Net cash (used in) provided by operating activities

(158,759)

1,095,955

1,049,295

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

(10,049,145)

(10,251,611)

(16,981,702)

12,445,566
(4,814,251)

9,929,506
(4,040,208)

15,681,935
(2,626,409)

1,308,212
1,765,847
(79,840)
102,471
(85,224)
70,784

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)

Net cash provided by (used in) investing activities

664,420

$ (1,630,174) $ (1,072,854)

See accompanying notes to the consolidated financial statements

108

E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS—(Continued)

(In thousands)

Cash flows from financing activities:

Net increase 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 and springing lien notes
Net cash flow from derivatives hedging liabilities
Other

Net cash provided by (used in) financing activities

Effect of exchange rates on cash

Increase (decrease) in cash and equivalents
Cash and equivalents, beginning of period

Cash and equivalents, end of period

Supplemental disclosures:

Cash paid for interest
Cash paid (refund received) for income taxes
Non-cash investing and financing activities:

Transfers from loans to other real estate owned and repossessed assets
Conversion of convertible debentures to common stock
Reclassification of loans held-for-investment to loans held-for-sale
Transfers from loans to available-for-sale securities

Year Ended December 31,

2012

2011

2010

$ 1,931,452

$ 1,219,455

—

(560,838)
2,930,000
(4,283,600)
1,305,000
(1,173,736)
25,253
(17,537)

—

(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)

—
—

(218,185)
39,106

155,994

259,712

(1,086,130)

—

797

661,655
2,099,839

(274,507)
2,374,346

(1,108,892)
3,483,238

$ 2,761,494

$ 2,099,839

$ 2,374,346

$
$

$
$
$
$

592,005
6,370

$
$

435,776

$
(6,606) $

425,211
(78,734)

$
128,401
$
355
— $
— $

180,964
660,946

$
$
— $
— $

314,514
316,983
252,627
222,729

See accompanying notes to the consolidated financial statements

109

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 clear and settle
securities transactions for customers of other broker-dealers, including E*TRADE Securities LLC; and

• G1 Execution Services, LLC (formerly known as 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 over 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. 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 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
and securities, net are the result of activities in the Company’s operations, namely its balance sheet management
segment. Gains 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.

110

Related Parties—Based upon the Company’s review of publicly available information, as of December 31,
2012, Citadel was one of the Company’s largest shareholders and the Company believes Citadel owned
approximately 9.6% of its outstanding common stock and none of its outstanding debt. 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 periods presented, 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. Payments for these customer equity orders represented approximately 1% of the
Company’s total net revenue for each of the years ended December 31, 2012, 2011 and 2010.

Joseph M. Velli, Chairman and CEO of ConvergEx Group, joined the Board of Directors in January 2010.
During the periods presented, the Company used ConvergEx Group for clearing and transfer agent services.
Payments for these services represented less than 1% of the Company’s total operating expenses for each of the
years ended December 31, 2012, 2011 and 2010.

Use of Estimates—The consolidated financial statements were prepared in accordance with GAAP, which
requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and related notes for the periods presented. Actual results could differ from management’s
estimates. Certain significant accounting policies are 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 changes could reasonably occur include: allowance for loan losses;
valuation of goodwill and other intangible assets; estimates of effective tax rates, deferred taxes and valuation
allowance; classification and valuation of certain investments; accounting for derivative instruments; and fair
value measurements.

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 $2.1 billion and $1.0 billion at December 31, 2012 and 2011, respectively, of overnight cash deposits, a
portion of which the Company is required to maintain with the Federal Reserve Bank.

Cash Required to be Segregated Under Federal or Other Regulations—Certain cash balances that are
required to be segregated for the exclusive benefit of the Company’s brokerage customers are included in the
cash required to be segregated under federal or other regulations line item.

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. 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, net of tax. Realized and
unrealized gains or losses on available-for-sale debt securities are computed using the specific identification
method.
income.
Interest earned on available-for-sale debt securities is included in operating interest
Amortization or accretion of premiums and discounts are also recognized in operating interest income using the

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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. 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 $8.2 billion and $6.8 billion as of December 31, 2012 and 2011,
respectively. Of this amount, $1.5 billion and $1.3 billion had been pledged or sold in connection with securities
loans, bank borrowings and deposits with clearing organizations as of December 31, 2012 and 2011, 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 and greater past due, TDRs that are on nonaccrual status for all
classes of loans and certain junior liens that have a delinquent senior lien. 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 and
certain junior liens that have a delinquent senior lien, return to accrual status when the loan becomes less than
90 days past due. TDRs return to accrual status after six consecutive payments have been made in accordance
with the modified terms.

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. TDRs are charged-off when certain characteristics of the loan, including CLTV,
borrower’s credit and type of modification, cast substantial doubt on the borrower’s ability to repay the loan.
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.

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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. TDRs also include loans that have been charged-off due to bankruptcy
notification even if the loan has not been modified under the Company’s programs. Upon being classified as a
TDR, such loan is categorized as an impaired loan and is considered impaired until maturity regardless of
whether the borrower performs under the terms of the loan.

Impairment on loan modifications is measured on an individual basis, generally using a discounted cash
flow model. When certain characteristics of the modified loan cast substantial doubt on the borrower’s ability to
repay the loan, the Company identifies the loan as collateral dependent and charges-off the amount of the
modified loan balance in excess of the estimated current value of the underlying property less estimated costs to
sell. Collateral dependent TDRs are identified based on the terms of the modification, which includes assigning a
higher level of risk to loans in which the LTV or CLTV is greater than 110%, a borrower’s credit score is less
than 600 and certain types of modifications, such as interest-only payments and terms longer than 30 years.
TDRs that are not identified as higher risk using this risk assessment process and for which impairment is
measured using a discounted cash flow model, continue to be evaluated in the event that they become higher risk
collateral dependent TDRs.

The Company utilizes its own modification programs in pursuing TDRs. The various types of economic
concessions that may be granted in a loan modification typically consist of interest rate reductions, maturity date
extensions, principal forgiveness or a combination of these concessions. The Company 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 and these minor loan
modifications are not classified as TDRs.

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.

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. TDRs are classified as nonperforming until six consecutive payments
have been made.

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. 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

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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, 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 develop the
forecast of 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 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.

The general allowance for loan losses also included a qualitative component to account for a variety of
factors that are not directly considered in the quantitative loss model but are factors the Company believes may
impact the level of credit losses. Examples of these factors are: external factors, such as changes in the macro-
economic, legal and regulatory environment; internal factors, such as procedural changes and reliance on third
parties; and portfolio specific factors, such as the impact of payment resets and historical loan modification
activity, which impacts the historical performance data used to forecast delinquency and default in the general
allowance for loan losses.

The total qualitative component was $44 million and $124 million as of December 31, 2012 and 2011,
respectively. The qualitative component for the one- to four-family and home equity loan portfolios was 17% and
35% of the general allowance for loan losses at December 31, 2012 and 2011, respectively. The decrease in the
qualitative component in these loan portfolios from December 31, 2011 to December 31, 2012 reflects the
completion of the Company’s evaluation of certain programs and practices that were designed in accordance with
guidance from the Company’s former regulator, the OTS. This evaluation was initiated in connection with the
transition from the OTS to the OCC. As a result of the evaluation, loan modification policies and procedures
were aligned with the guidance from the OCC. The qualitative component was increased to 35% during the
fourth quarter of 2011 to reflect additional estimated losses due to this evaluation. The review resulted in a
significant increase in charge-offs during the year ended December 31, 2012 and a corresponding decrease in the
qualitative component. The qualitative component for the consumer and other loan portfolio was 17% and 15%
of the general allowance at December 31, 2012 and 2011, respectively.

For modified loans accounted for as TDRs that are valued using the discounted cash flow model, 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. Specifically, a loan that has a more severe delinquency history prior to
modification will have a higher future default rate in the discounted cash flow analysis than a loan that was not as
severely delinquent. For both of the one- to four-family and home equity loan portfolio segments, the pre-
modification delinquency status, the borrower’s current credit score and other credit bureau attributes, in addition
to each loan’s individual default experience and credit characteristics, are incorporated into the calculation of 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

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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 thirty five years. Land is carried at cost. An impairment loss is recognized 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 exceeds its fair value and the loss 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—Real estate owned and repossessed assets are included in the
other assets line item in the consolidated balance sheet. Real estate owned (“REO”) represents real estate
acquired through foreclosure and also includes those properties for which the Company has taken physical
possession, even though legal foreclosure or repossession proceedings have not taken place. Both REO and the
repossessed assets are carried at the lower of carrying value or fair value, less estimated costs to sell.

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. For additional information on income
taxes, see Note 14—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.

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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 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). For additional information on derivative instruments and
hedging activities, see Note 6—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
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. For additional information on fair value, see
Note 3—Fair Value Disclosures.

Operating Interest Income—Operating interest income is recognized as earned through holding interest-
earning assets, such as loans, available-for-sale securities, held-to-maturity securities, margin receivables, cash
and equivalents, segregated cash, and securities borrowed and other balances. 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 through holding interest-
bearing liabilities, such as deposits, customer payables, securities sold under agreements to repurchase, FHLB
advances and other borrowings, and securities loaned and other 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.

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Fees and Service Charges—Fees and service charges consist of order flow revenue, mutual fund service
fees, foreign exchange revenue, reorganization fees, advisor management fees and other fees and service charges.
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 purchases 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 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.

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 consist of fees from software and services for managing equity
including
compensation plans, which are recognized in accordance with applicable accounting guidance,
software revenue recognition accounting guidance. Other revenues also include revenue ancillary to the
Company’s customer transactions and income from the cash surrender value of BOLI.

Share-Based Payments—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

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of nonqualified or incentive stock options, restricted stock awards and restricted stock units to officers, directors
and certain 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 of the grant. 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.

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. As
of December 31, 2012, there were 2.4 million shares outstanding and $1.7 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 1.5 years. The Company recognized $2.8 million, $2.4 million and $8.4 million in
compensation expense for stock options for the years ended December 31, 2012, 2011, and 2010, respectively.

The Company issues restricted stock awards and restricted stock units to certain 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. As of December 31, 2012, there were 3.2 million units
outstanding and $22.9 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 $9.9 million, $15.4 million and $20.9 million for the years ended
December 31, 2012, 2011 and 2010, respectively. The Company recognized $17.7 million, $11.7 million and
$17.0 million in compensation expense for restricted stock awards and restricted stock units for the years ended
December 31, 2012, 2011 and 2010, respectively.

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. 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.

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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 was applied prospectively to transactions or
modifications of existing transactions that occurred on or after January 1, 2012. 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 descriptions of certain requirements in
GAAP for measuring fair value and the requirements for disclosing information about fair value measurement.
The amended accounting guidance became effective January 1, 2012 for the Company, and was 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 and the Company’s disclosures reflect the adoption of the amended
disclosure guidance in Note 3—Fair Value Disclosures.

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. The Company’s presentation of the total of
comprehensive income, the components of net income and the components of other comprehensive income in
two separate but consecutive statements reflects the adoption of the amended presentation guidance.

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
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, repurchase agreements and reverse repurchase agreements,
and securities borrowing and securities lending transactions. The amended disclosure guidance became 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 Company’s disclosures will reflect the adoption of the amended
disclosure guidance in the Form 10-Q for the quarterly period ending March 31, 2013.

119

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB amended the presentation guidance on the reporting of amounts reclassified out
of accumulated other comprehensive income. The amended guidance does not change the current requirements
for reporting net income or other comprehensive income in financial statements. However, the guidance amends
the presentation of the amounts reclassified out of accumulated other comprehensive income by component. In
addition, the amended guidance requires the presentation, either on the face of the statement where net income is
presented or in the notes, of significant amounts reclassified out of accumulated other comprehensive income by
the respective line items of net income. The amended guidance became effective for annual and interim periods
beginning on January 1, 2013 for the Company and will be applied prospectively. The Company’s disclosures
will reflect the adoption of the amended presentation guidance in the Form 10-Q for the quarterly period ending
March 31, 2013.

NOTE 2—OPERATING INTEREST INCOME AND OPERATING INTEREST EXPENSE

The following table shows the components of operating interest income and operating interest expense for

the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):

Operating interest income:

Loans
Available-for-sale securities
Held-to-maturity securities
Margin receivables
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,

2012

2011

2010

$ 496,466
359,977
236,961
216,086
61,608

$ 692,127
421,304
136,953
221,717
60,238

$ 879,013
386,347
35,930
200,260
45,163

1,371,098

1,532,339

1,546,713

(158,518)
(92,630)
(24,042)
(10,843)

(153,079)
(106,201)
(42,879)
(10,221)

(129,574)
(119,344)
(62,828)
(8,684)

(286,033)

(312,380)

(320,430)

$1,085,065

$1,219,959

$1,226,283

(1) Operating interest income reflects $(9.7) million, $(10.3) million, and $21.9 million in income on hedges that qualify for hedge

accounting for the years ended December 31, 2012, 2011, and 2010, respectively.

(2) Operating interest expense reflects $142.1 million, $136.7 million, and $122.4 million in expense on hedges that qualify for hedge

accounting for the years ended December 31, 2012, 2011, and 2010, respectively.

NOTE 3—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

120

date. The fair value measurement accounting guidance describes the following three levels used to classify fair
value measurements:

• Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that are

accessible by the Company.

• Level 2—Quoted prices in markets that are not active or for which all significant inputs are observable,

either directly or indirectly.

• Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities.

The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value
may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is
based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of
the significance of a particular input to a fair value measurement requires judgment and consideration of factors
specific to the asset or liability.

Recurring Fair Value Measurement Techniques

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
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, 2012. The weighted average coupon rates for the residential
mortgage-backed securities as of December 31, 2012 are shown in the following table:

Agency mortgage-backed securities
Agency CMOs
Non-agency CMOs

Weighted Average
Coupon Rate

3.18 %
3.43 %
3.18 %

The fair value of agency mortgage-backed securities was determined using a market approach with quoted
market prices, recent market transactions and spread data for similar instruments. The fair value of agency CMOs
was determined using market and income approaches 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.

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.

121

The Company considers the price transparency for non-agency CMOs to be a key determinant of the degree
of judgment involved in determining the fair value. As of December 31, 2012, the Company’s non-agency CMOs
were categorized in Level 2 and Level 3 of the fair value hierarchy. The Company’s portfolio management group
determines the fair value measurements using a discounted cash flow methodology for non-agency CMOs on a
monthly basis with market observable data to the extent available, and a pricing service is utilized to corroborate
the market observability of significant inputs. The fair value measurements, valuation techniques and level
classification methodology are reviewed and compared to prior periods on a quarterly basis by management from
the finance, credit, enterprise risk management and compliance departments.

The significant inputs used in the fair value measurement of non-agency CMOs are yield, default rate, loss
severity and prepayment rate. Significant changes in any of those inputs in isolation would result in a significant
change in the fair value. Generally, an increase in the yield, default rate or loss severity in isolation would result
in a decrease in the fair value, and an increase in the prepayment rate would result in an increase in the fair value.
In addition, an increase in the assumption used for the prepayment rate generally will result in an increase in
yield.

The following table presents additional information about the underlying loans and significant inputs used in
discounted cash flow methodologies for the valuation of non-agency CMOs that were categorized in Level 3 of
the fair value hierarchy as of December 31, 2012:

Underlying loans:
Coupon rate
Maturity (years)

Significant inputs:

Yield
Default rate(1)
Loss severity
Prepayment rate

Weighted
Average

Range

3.51% 2.56%-6.83%

4%
12%
42%
10%

14-25

2%-16%
1%-61%
19%-100%
0%-87%

(1)

The default rate reflects the implied rate necessary to equate market price to the book yield given the market credit assumption.

Other Debt Securities

The fair value measurements of 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, 2012. 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
judgment on the part of
provider. The Company does not consider these models to involve significant

122

management, and the Company corroborated the fair value measurements with counterparty valuations. The
Company’s derivative instruments were categorized in Level 2 of the fair value hierarchy. The consideration of
credit risk, the Company’s or the counterparty’s, did not result in an adjustment to the valuation of its derivative
instruments in the periods presented.

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 securities owned and securities sold, not yet purchased was determined using listed or quoted market prices
and the majority were categorized in Level 1 of the fair value hierarchy.

Nonrecurring Fair Value Measurement Techniques

Loans Receivable and REO

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
underlying property less estimated costs to sell has been charged-off; and 2) real estate acquired through physical
possession of property or upon foreclosure that is carried at the lower of the property’s carrying value or fair
value, less estimated selling costs.

Loans that have been delinquent for 180 days or in bankruptcy are charged-off based on the estimated
current value of the underlying property less estimated selling costs and are classified as nonperforming loans.
These loans continue to be reported as nonperforming unless they subsequently meet the requirements for being
reported as performing loans. TDRs that are charged-off based on the estimated current value of the underlying
property less estimated selling costs are classified as nonperforming loans at the time of modification and return
to accrual status after six consecutive payments are made in accordance with the modified terms. Property
valuations for these one- to four-family and home equity loans are based on the most recent “as is” property
valuation data available, which may include appraisals, broker price opinions, prices for similar properties,
automated valuation models or home price indices. Subsequent
to the recording of an initial fair value
measurement, these loans continue to be measured at fair value on a nonrecurring basis, utilizing the estimated
value of the underlying property less estimated selling costs. These property valuations are updated on a monthly,
quarterly or semi-annual basis depending on the type of valuation initially used. If the value of the underlying
property has declined, an additional charge-off is recorded. If the value of the underlying property has increased,
previously charged-off amounts are not reversed. If the valuation data obtained is significantly different from the
valuation previously received, the Company orders additional property valuation data to corroborate or update
the valuation.

Property valuations for real estate acquired through physical possession of property or upon foreclosure are
based on the lowest value of the most recent property valuation data available, which may include appraisals,
listing prices or approved offer prices. Nonrecurring fair value measurements on one- to four-family and home
equity loans and real estate owned were classified as Level 3 of the fair value hierarchy as the majority of the
valuations included Level 3 inputs that were significant to the estimate of fair value.

Real estate owned and loans receivable that have been subject to fair value measurement requirements are
evaluated on a quarterly basis in accordance with policies and procedures that were designed to be in compliance
with guidance from the Company’s regulators. These policies and procedures govern the frequency of the review,
the use of acceptable valuation methods, and the consideration of estimated selling costs.

123

The following table presents additional information about significant unobservable inputs used in the
valuation of assets measured at fair value on a nonrecurring basis that were categorized in Level 3 of the fair
value hierarchy as of December 31, 2012 (dollars in thousands):

One- to four-family
Home equity
Real estate owned

Unobservable Inputs

Average

Range

Appraised value
Appraised value
Appraised value

$371
$276
$329

$6-$3,025
$9-$1,900
$1-$3,100

Recurring and Nonrecurring Fair Value Measurements

Assets and liabilities measured at fair value at December 31, 2012 and 2011 are summarized in the

following tables (dollars in thousands):

December 31, 2012:
Recurring fair value measurements:
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
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

Level 1

Level 2

Level 3

Total
Fair Value

$100,259 $

1,011 $ — $

101,270

— 12,097,298
185,668
—
— 12,282,966

— 12,097,298
235,163
12,332,461

49,495
49,495

—
—
—
—
—

527,996
546,762
31,346
4,455
1,110,559

—
—
—
—
—

527,996
546,762
31,346
4,455
1,110,559

— 13,393,525

49,495

13,443,020

—
32,000

32,000

14,890
—

14,890

—
—

—

14,890
32,000

46,890

Total assets measured at fair value on a recurring basis(3)

$132,259 $13,409,426 $ 49,495 $13,591,180

Liabilities

Derivative liabilities(1)
Securities sold, not yet purchased

Total liabilities measured at fair value on a recurring basis(3)

Nonrecurring fair value measurements:(4)

Loans receivable:

One- to four-family
Home equity

Total loans receivable

REO

Total assets measured at fair value on a nonrecurring basis

$ — $
87,088
$ 87,088 $

328,504 $ — $

489

—

328,993 $ — $

328,504
87,577
416,081

$ — $
—
—
—
$ — $

— $752,008 $
—
90,663
— 842,671
—
75,885
— $918,556 $

752,008
90,663
842,671
75,885
918,556

(1)

The majority of derivative assets and liabilities are interest rate contracts. Information related to derivative instruments is detailed in Note
6—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 29% and 1% of the Company’s total assets and total

liabilities, respectively.

(4) Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet as of

December 31, 2012, and for which a fair value measurement was recorded during the period.

124

December 31, 2011:
Recurring fair value measurements:
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
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

Derivative liabilities(1)
Securities sold, not yet purchased

Level 1

Level 2

Level 3

Total
Fair Value

$53,025 $

1,347 $ — $

54,372

— 13,965,712
244,447
—
— 14,210,159

— 13,965,712
341,553
14,307,265

97,106
97,106

731,280
—
554,194
—
41,069
—
17,685
—
—
1,344,228
— 15,554,387

—
—
—
—
—
97,106

731,280
554,194
41,069
17,685
1,344,228
15,651,493

—

66,534
$53,025 $15,622,268 $ 97,106 $15,772,399

66,534

—

$ — $
48,185

358,203 $ — $

—

358,203
48,271

Total liabilities measured at fair value on a recurring

basis(2)

$48,185 $

358,289 $ — $

406,474

Nonrecurring fair value measurements:(3)

Loans receivable:

One- to four-family
Home equity

Total loans receivable

REO

$ — $
—
—
—

— $823,338 $
61,163
—
— 884,501
81,505
—

823,338
61,163
884,501
81,505

Total assets measured at fair value on a nonrecurring

basis

$ — $

— $966,006 $

966,006

(1) All derivative assets and liabilities are interest

rate contracts.

Information related to derivative instruments is detailed in

Note 6—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.

(3) Represents 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 for which a fair value measurement was recorded during the period.

The following table presents the losses associated with the assets measured at fair value on a nonrecurring

basis during the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):

One- to four-family
Home equity

December 31,

2012

2011

2010

$193,250
291,316

$221,717
112,426

$291,351
152,386

Total losses on loans receivable measured at fair value

$484,566

$334,143

$443,737

Losses on REO measured at fair value

$ 12,068

$ 27,582

$ 41,203

125

Transfers Between Levels 1 and 2

For assets and liabilities measured at fair value on a recurring basis, the Company’s transfers between levels
of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period on a quarterly
basis. The Company’s transfers of securities owned and securities sold, not yet purchased between Level 1 and 2
are generally driven by trading activities of those securities during the period. The Company had no material
transfers between Level 1 and 2 during the year ended December 31, 2012.

Level 3 Rollforward for Recurring Fair Value Measurements

Level 3 assets and liabilities include 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.

The following tables present additional information about Level 3 assets and liabilities measured at fair

value on a recurring basis for the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):

Opening balance, January 1, 2012
Losses recognized in earnings(1)
Net gains recognized in other comprehensive income(2)
Sales
Settlements
Transfers in to Level 3(3)(4)
Transfers out of Level 3(3)(5)

Closing balance, December 31, 2012

Available-for-sale
Securities

Non-agency
CMOs

$ 97,106
(12,809)
17,917
(68,116)
(22,677)
210,819
(172,745)

$ 49,495

(1)

Losses recognized in earnings were related to instruments held at December 31, 2012 and are reported in the net impairment line item.

(2) Net gains recognized in other comprehensive income are reported in the net change from available-for-sale securities line item.
(3)

The Company’s transfers in and out of Level 3 are as of the beginning of the reporting period on a quarterly basis.

(4) Non-agency CMOs transferred in to Level 3 due to a lack of observable market data, resulting from a decrease in market activity for the

securities.

(5) Non-agency CMOs transferred out of Level 3 because observable market data became available for those securities.

Opening balance, January 1, 2011
Net losses recognized in earnings(1)
Net gains recognized in other comprehensive income(2)
Sales
Settlements
Transfers in to Level 3(3)(4)
Transfers out of Level 3(3)(5)

Closing balance, December 31, 2011

Available-for-sale
Securities

Trading
Securities

Non-agency
CMOs

$
630
(1,560)
—
(6,299)
(1,700)
8,929
—

$ 195,220
(7,898)
16,089
—
(28,205)
254,637
(332,737)

$ —

$ 97,106

(1)

The majority of net losses recognized in earnings were related to instruments held at December 31, 2011 and are reported in the net
impairment line item.

(2) Net gains recognized in other comprehensive income are reported in the net change from available-for-sale securities line item.

126

(3)

The Company’s transfers in and out of Level 3 are as of the beginning of the reporting period on a quarterly basis.

(4) Non-agency CMOs transferred in to Level 3 due to a lack of observable market data, resulting from a decrease in market activity for the

securities.

(5) Non-agency CMOs transferred out of Level 3 because observable market data became available for those securities.

Opening balance, January 1, 2010
Net losses recognized in earnings(1)
Net gains (losses) recognized in other comprehensive loss(2)
Purchases, sales, and other settlements and issuances, net
Transfers in to Level 3(3)(4)
Transfers out of Level 3(3)(5)

Available-for-sale Securities

Agency
Mortgage-backed
Securities and
CMOs

$ 17,972

—
—
—
—
(17,972)

Trading
Securities

$1,491
(938)
—

—
—

Non-agency
CMOs

Corporate
Investments

$ 234,629
(35,799)
80,695
(32,520)
139,088
(190,873)

$ 173
—

(9)
(119)
—
(45)

Closing balance, December 31, 2010

$ 630

$ —

$ 195,220

$ —

(1)

(2)

(3)

The majority of net losses recognized in earnings were related to instruments held at December 31, 2010 and are reported in the net
impairment line item.
The majority of net gains (losses) recognized in other comprehensive 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) Non-agency CMOs transferred in to Level 3 due to a lack of observable market data, resulting from a decrease in market activity for the

securities.

(5) Non-agency CMOs transferred out of Level 3 because observable market data became available for those securities.

The Company’s transfers of certain non-agency 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, 2012, 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.

127

Fair Value of Financial Instruments Not Carried at Fair Value

The following table summarizes the carrying values, fair values and fair value hierarchy level classification
of financial instruments that are not carried at fair value on the consolidated balance sheet at December 31, 2012
and 2011 (dollars in thousands):

Assets

Cash and equivalents
Cash required to be segregated under

federal or other regulations

Held-to-maturity securities:

Agency mortgage-backed securities

and CMOs

Agency debentures
Agency debt securities

Total held-to-maturity

securities

Margin receivables
Loans receivable, net:

One- to four-family
Home equity
Consumer and other

December 31, 2012

Carrying
Value

Level 1

Level 2

Level 3

Total
Fair Value

$ 2,761,494 $2,761,494 $

— $

— $ 2,761,494

376,898 $ 376,898 $

— $

376,898

$ 7,887,555 $
163,434
1,488,959

— $ 8,182,064 $
—
—

169,769
1,558,663

— $ 8,182,064
—
169,769
1,558,663
—

$ 9,539,948 $

— $ 9,910,496 $

— $ 9,910,496

$ 5,804,041 $

— $ 5,804,041 $

— $ 5,804,041

$ 5,281,702 $
4,002,486
814,535

— $
—
—

— $

— $4,561,821 $ 4,561,821
3,551,357
— 3,551,357
838,721
838,721
—

— $8,951,899 $ 8,951,899

— $

67,400 $

67,400

Total loans receivable, net(1)

$10,098,723 $

Investment in FHLB stock

67,400 $

Liabilities

Deposits
Securities sold under agreements to

repurchase

Customer payables
FHLB advances and other borrowings
Corporate debt

$28,392,552 $

— $28,394,440 $

— $28,394,440

$ 4,454,661 $
$ 4,964,922 $
$ 1,260,916 $
$ 1,764,982 $

— $ 4,493,463 $
— $ 4,964,922 $
— $
— $ 1,837,736 $

— $ 4,493,463
— $ 4,964,922
926,750 $ 196,765 $ 1,123,515
— $ 1,837,736

(1)

The carrying value of loans receivable, net includes the allowance for loan loss of $480.7 million and the loans receivable that are valued
at fair value on a nonrecurring basis as of December 31, 2012.

Assets

Held-to-maturity securities
Loans receivable, net(1)

Liabilities

Deposits
Securities sold under agreements to repurchase
FHLB advances and other borrowings
Corporate debt

December 31, 2011(2)

Carrying
Value

Fair
Value

$ 6,079,512
$12,332,807

$ 6,282,989
$11,142,297

$26,459,985
$ 5,015,499
$ 2,736,935
$ 1,493,552

$26,473,902
$ 5,075,415
$ 2,671,877
$ 1,760,564

(1)

The carrying value of loans receivable, net includes the allowance for loan losses of $822.8 million and the loans receivable that are
valued at fair value on a nonrecurring basis as of December 31, 2011.

(2) 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, 2012.

128

The fair value measurement techniques for financial instruments not carried at fair value on the consolidated

balance sheet at December 31, 2012 and 2011 are summarized as follows:

Cash and equivalents, cash required to be segregated under federal or other regulations, 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.

Held-to-maturity securities—The held-to-maturity securities portfolio included agency mortgage-backed
securities and CMOs, agency debentures, and agency debt securities. The fair value of agency mortgage-backed
securities is determined using market and income approaches with quoted market prices, recent market
transactions and spread data for similar instruments. The fair value of agency CMOs and agency debt securities is
determined using market and income approaches 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 using discount factors
derived from current observable rates implied for other similar instruments with similar remaining maturities.

Securities sold under agreements to repurchase—Fair value is determined by discounting future cash flows
using discount factors derived from current observable rates implied for other similar instruments with similar
remaining maturities.

FHLB advances and other borrowings—Fair value for FHLB advances is estimated by discounting future
cash flows using discount factors derived from current observable rates implied for similar instruments with
similar remaining maturities. 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, 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.

Fair Value of Commitments and Contingencies

In the normal course of business, the Company makes various commitments to extend credit and incur
contingent liabilities that are not reflected in the consolidated balance sheet. Changes in the economy or interest
rates may influence the impact that these commitments and contingencies have on the Company in the future.
The Company does not estimate the fair value of those commitments. The Company has the right to cancel these

129

in the past five years. As of December 31, 2012,

commitments in certain circumstances and has closed a significant amount of customer home equity lines of
credit
the Company had $0.6 billion of unfunded
commitments to extend credit. Information related to such commitments and contingent liabilities is detailed in
Note 19—Commitments, Contingencies and Other Regulatory Matters.

NOTE 4—AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES

The amortized cost basis and fair value of available-for-sale and held-to-maturity securities at December 31,

2012 and 2011 are shown in the following tables (dollars in thousands):

December 31, 2012:

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
Agency debt securities
Municipal bonds
Corporate bonds

Total investment securities

Total available-for-sale securities

Held-to-maturity securities:

Residential mortgage-backed securities:

Amortized
Cost

Gross
Unrealized /
Unrecognized
Gains

Gross
Unrealized /
Unrecognized
Losses

Fair Value

$11,881,185
260,064
12,141,249

515,990
525,408
30,235
5,478
1,077,111
$13,218,360

$232,905
4,362
237,267

12,434
21,354
1,111
—
34,899
$272,166

$ (16,792)
(29,263)
(46,055)

$12,097,298
235,163
12,332,461

(428)
—
—
(1,023)
(1,451)
$ (47,506)

527,996
546,762
31,346
4,455
1,110,559
$13,443,020

Agency mortgage-backed securities and CMOs

$ 7,887,555

$301,686

(7,177)

$ 8,182,064

Investment securities:
Agency debentures
Agency debt securities

Total investment securities

Total held-to-maturity securities

December 31, 2011:

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
Agency debt securities
Municipal bonds
Corporate bonds

Total investment securities

Total available-for-sale securities

Held-to-maturity securities:

Residential mortgage-backed securities:

163,434
1,488,959
1,652,393
$ 9,539,948

6,335
69,705
76,040
$377,726

$13,772,134
422,568
14,194,702

743,246
541,038
42,325
25,357
1,351,966
$15,546,668

$203,541
3,331
206,872

—
13,654
261
—
13,915
$220,787

—

(1)
(1)
(7,178)

169,769
1,558,663
1,728,432
$ 9,910,496

(9,963)
(84,346)
(94,309)

$13,965,712
341,553
14,307,265

(11,966)
(498)
(1,517)
(7,672)
(21,653)
$(115,962)

731,280
554,194
41,069
17,685
1,344,228
$15,651,493

Agency mortgage-backed securities and CMOs

$ 5,296,520

$162,975

(1,545)

$ 5,457,950

Investment securities:
Agency debentures
Agency debt securities

Total investment securities

Total held-to-maturity securities

163,412
619,580
782,992
$ 6,079,512

5,764
36,283
42,047
$205,022

—
—
—
(1,545)

169,176
655,863
825,039
$ 6,282,989

130

Contractual Maturities

The contractual maturities of all available-for-sale and held-to-maturity debt securities at December 31,

2012 are shown below (dollars in thousands):

Available-for-sale 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

66,610
1,073,338
12,078,412

68,642
1,102,366
12,272,012

$13,218,360

$13,443,020

322,665
2,895,625
6,321,658

336,188
3,082,544
6,491,764

$ 9,539,948

$ 9,910,496

The Company pledged $2.4 billion and $3.9 billion at December 31, 2012 and 2011, respectively, of
available-for-sale securities and $2.9 billion and $2.1 billion at December 31, 2012 and 2011, respectively, of
held-to-maturity securities as collateral for federal reserves, repurchase agreements and other purposes.

131

Investments with Unrecognized or Unrealized Losses

The following tables show the fair value and unrealized or unrecognized losses on available-for-sale and
held-to-maturity securities, aggregated by investment category, and the length of time that individual securities
have been in a continuous unrealized or unrecognized loss position at December 31, 2012 and 2011 (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, 2012:
Available-for-sale securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and

CMOs

Non-agency CMOs
Investment securities:
Agency debentures
Corporate bonds

$2,588,947

—

$(16,680) $
—

16,337
198,635

(112) $2,605,284
198,635

(29,263)

$ (16,792)
(29,263)

62,786
—

(428)
—

—
4,455

—
(1,023)

62,786
4,455

(428)
(1,023)

Total temporarily impaired available-for-

sale securities

$2,651,733

$(17,108) $ 219,427

$(30,398) $2,871,160

$ (47,506)

Held-to-maturity securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and

CMOs

Agency debt securities

$1,240,008
84

$ (6,937) $

(1)

2,427
—

(240) $1,242,435
84
—

(7,177)
(1)

Total temporarily impaired held-to-maturity

securities

$1,240,092

$ (6,938) $

2,427

(240) $1,242,519

(7,178)

December 31, 2011:
Available-for-sale securities:

Residential mortgage-backed securities:

Agency mortgage-backed securities and

CMOs

Non-agency CMOs
Investment securities:
Agency debentures
Agency debt securities
Municipal bonds
Corporate bonds

$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)

Total temporarily impaired available-for-

sale securities

$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

$ 343,340

$ (1,192) $

42,445

Total temporarily impaired held-to-maturity

securities

$ 343,340

$ (1,192) $

42,445

(353) $ 385,785

(1,545)

132

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, 2012 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 as of the balance sheet date 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. Agency mortgage-backed securities and CMOs,
agency debentures and agency debt securities are guaranteed by U.S. government sponsored and federal
agencies. Municipal bonds and corporate bonds are evaluated by reviewing the credit-worthiness of the issuer
and general market conditions. The Company does not
the securities in an unrealized or
unrecognized loss position as of the balance sheet date and it is not more likely than not that the Company will be
required to sell the debt securities before the anticipated recovery of its remaining amortized cost of the securities
in an unrealized or unrecognized loss position at December 31, 2012.

intend to sell

losses. The estimate of expected future credit

The majority of the Company’s available-for-sale and held-to-maturity portfolio consists of residential
the Company calculates the credit
mortgage-backed securities. For residential mortgage-backed securities,
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 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, 2012:

Default rate(1)
Loss severity
Prepayment rate

(1) Represents the expected default rate for the next twelve months.

December 31, 2012

Weighted
Average

Range

4%
48%
7%

1 % - 24 %
30 % - 70 %
2 % - 15 %

133

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 years ended December 31, 2012, 2011 and 2010 (dollars in thousands):

Credit loss balance, beginning of period
Additions:
Initial credit impairment
Subsequent credit impairment
Securities sold

Year Ended December 31,

2012

2011

2010

$202,945

$188,038

$150,372

987
15,938
(33,148)

61
14,846
—

1,642
36,024
—

Credit loss balance, end of period

$186,722

$202,945

$188,038

Within the securities portfolio, the highest concentration of credit risk is the non-agency CMO portfolio. As
of December 31, 2012, the Company held approximately $179.9 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,

2012

2011

2010

$(19,799)

$ (9,190)

$(41,510)

2,874

(5,717)

3,840

$(16,925)

$(14,907)

$(37,670)

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) for the years ended December 31, 2012, 2011 and 2010 are as follows (dollars in thousands):

Gains 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

Year Ended December 31,

2012

2011

2010

588

146

6,266

212,323
(5,059)
(306)
(7,180)

124,360
—
(1,883)
(2,390)

160,952
(187)
162
(981)

199,778

120,087

159,946

$200,366

$120,233

$166,212

134

NOTE 5—LOANS RECEIVABLE, NET

Loans receivable, net at December 31, 2012 and 2011 are summarized as follows (dollars in thousands):

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,

2012

2011

$ 5,442,174
4,223,461
844,942

$ 6,615,808
5,328,657
1,113,257

10,510,577
68,897
(480,751)

13,057,722
97,901
(822,816)

$10,098,723

$12,332,807

At December 31, 2012, we pledged $8.2 billion and $0.8 billion of loans as collateral to the FHLB and
Federal Reserve Bank, respectively. 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. Additionally, the Company’s entire loans
receivable portfolio was serviced by other companies at December 31, 2012 and 2011.

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 December 31, 2012 and 2011 (dollars in thousands):

Recorded Investment

Allowance for Loan
Losses

December 31,

2012

2011

2012

2011

Loans collectively evaluated for impairment
Loans individually evaluated for impairment (TDRs)

$ 9,073,326 $11,736,731 $309,377 $502,673
1,418,892 171,374 320,143

1,506,148

Total recorded investment in loans receivable

$10,579,474 $13,155,623 $480,751 $822,816

Credit Quality

The Company tracks and reviews factors to predict and monitor credit risk in its mortgage loan portfolio on
an ongoing basis. These factors include: loan type, estimated current LTV/CLTV ratios, delinquency history,
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 at least a
quarterly 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 15% of the home equity portfolio
was in the first lien position as of December 31, 2012. 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
approximately 21% of home equity installment loans and approximately 79% of home equity lines of credit.

135

the draw period, which ranges from five to ten years. At December 31, 2012, 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 80% 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, 2012:

Period of Conversion to Amortizing Loan

Already amortizing
Year ending December 31, 2013
Year ending December 31, 2014
Year ending December 31, 2015
Year ending December 31, 2016
Year ending December 31, 2017

% of Home Equity Line of Credit
Portfolio

9%
4%
7%
26%
41%
13%

The following tables show the distribution of the Company’s mortgage loan portfolios by credit quality

indicator at December 31, 2012 and 2011 (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,

2012

2011

2012

2011

$1,324,167
1,404,415
1,231,448
1,482,144
$5,442,174

$1,596,299
1,716,799
1,527,266
1,775,444
$6,615,808

$ 927,559
776,199
932,033
1,587,670
$4,223,461

$1,168,851
967,945
1,191,862
1,999,999
$5,328,657

108.1%
71.2%

106.7%
71.0%

113.8%
79.4%

112.1%
79.2%

(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/CLTV ratio reflects the outstanding balance at the balance sheet date and the maximum available
line for home equity lines of credit, 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

One- to Four-Family

December 31,

Home Equity

December 31,

2012

2011

2012

2011

$2,317,933
3,124,241
$5,442,174

$2,845,571
3,770,237
$6,615,808

$2,166,554
2,056,907
$4,223,461

$2,699,164
2,629,493
$5,328,657

136

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,

2012

2011

2012

2011

$2,819,541
498,057
425,474
347,219
494,021
857,862
$5,442,174

$3,557,576
585,188
448,651
385,051
525,878
1,113,464
$6,615,808

$2,238,296
417,926
345,771
279,765
370,282
571,421
$4,223,461

$2,780,163
497,680
408,804
325,777
447,908
868,325
$5,328,657

(1)

Acquisition Channel

Purchased from a third party
Originated by the Company

One- to Four-Family

December 31,

Home Equity

December 31,

2012

2011

2012

2011

$ 4,484,322
957,852

$ 5,420,858
1,194,950

$ 3,723,238
500,223

$ 4,669,551
659,106

Total mortgage loans receivable

$ 5,442,174

$ 6,615,808

$ 4,223,461

$ 5,328,657

Vintage Year

2003 and prior
2004
2005
2006
2007
2008

One- to Four-Family

December 31,

Home Equity

December 31,

2012

2011

2012

2011

190,407
514,283
1,095,047
2,123,395
1,515,020
4,022

239,868
620,464
1,377,748
2,528,558
1,841,097
8,073

218,182
359,737
1,131,341
1,962,946
542,203
9,052

302,606
472,935
1,387,044
2,479,969
674,742
11,361

Total mortgage loans receivable

$ 5,442,174

$ 6,615,808

$ 4,223,461

$ 5,328,657

Average age of mortgage loans receivable (years)

6.7

5.7

6.9

5.9

Geographic Location

California
New York
Florida
Virginia
Other states

One- to Four-Family

December 31,

Home Equity

December 31,

2012

2011

2012

2011

$2,568,709
386,380
368,319
235,019
1,883,747

$3,096,028
488,209
458,219
280,772
2,292,580

$1,333,317
313,148
298,860
192,143
2,085,993

$1,690,319
387,038
377,754
234,140
2,639,406

Total mortgage loans receivable

$5,442,174

$6,615,808

$4,223,461

$5,328,657

137

Delinquent Loans

The following table shows total loans receivable by delinquency category as of December 31, 2012 and

2011 (dollars in thousands):

December 31, 2012
One- to four-family
Home equity
Consumer and other

Current

30-89 Days
Delinquent

90-179 Days
Delinquent

180+ Days
Delinquent

Total

$ 4,834,915
4,028,936
819,468

$233,796
89,347
19,101

$ 94,652
64,239
6,178

$278,811
40,939
195

$ 5,442,174
4,223,461
844,942

Total loans receivable

$ 9,683,319

$342,244

$165,069

$319,945

$10,510,577

December 31, 2011
One- to four-family
Home equity
Consumer and other

$ 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

The decrease in delinquent loans was due to both improving credit trends and the additional charge-offs
recorded as a result of the completion of the evaluation of certain programs and practices that were designed in
accordance with guidance from the Company’s former regulator, the OTS. This evaluation was initiated in
connection with the Company’s transition from the OTS to the OCC, its new primary banking regulator. As a
result of the evaluation, loan modification policies and procedures were aligned with the guidance from the OCC.
The review resulted in a significant increase in charge-offs during the first quarter of 2012, which also decreased
the loans receivable balance.

Nonperforming Loans

The Company classifies loans as nonperforming when they are no longer accruing interest. Nonaccrual
loans include loans that are 90 days and greater past due, TDRs that are on nonaccrual status for all classes of
loans and certain junior liens that have a delinquent senior lien. As of December 31, 2012, the Company had
nonaccrual loans of $639.1 million, $247.5 million and $6.4 million for one- to four-family, home equity and
consumer and other loans, respectively. As of December 31, 2011, the Company had nonaccrual loans of
$930.2 million, $281.4 million and $4.5 million for one- to four-family, home equity and consumer and other
loans, respectively.

138

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, 2012, 2011 and 2010 (dollars in thousands):

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

Charge-offs, net

Year Ended December 31, 2012

One- to
Four-Family

Home
Equity

Consumer
and Other

Total

$ 314,187
50,402
(189,918)
9,266

$ 463,288
271,030
(517,223)
40,238

$ 45,341
33,205
(51,060)
11,995

$ 822,816
354,637
(758,201)
61,499

(180,652)

(476,985)

(39,065)

(696,702)

Allowance for loan losses, end of period

$ 183,937

$ 257,333

$ 39,481

$ 480,751

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

During the year ended December 31, 2012, the allowance for loan losses decreased by $342.1 million from
$822.8 million at December 31, 2011. As a result of the evaluation of certain programs and practices discussed
above, loan modification policies and procedures were aligned with the guidance from the OCC. The review
resulted in a significant increase in charge-offs during the first quarter of 2012. The majority of the losses
associated with these charge-offs were previously reflected in the specific valuation allowance and qualitative
component of the general allowance for loan losses.

The Company utilizes third party loan servicers to obtain bankruptcy data on our borrowers and during the
third quarter of 2012, the Company identified an increase in bankruptcies reported by one specific servicer. In
researching this increase, it was discovered that the servicer had not been reporting historical bankruptcy data on
a timely basis. As a result, the Company implemented an enhanced procedure around all servicer reporting to
corroborate bankruptcy reporting with independent
third party data. Through this additional process,
approximately $90 million of loans were identified in which servicers failed to report the bankruptcy filing to us.
As a result, these loans were written down to the estimated current value of the underlying property less
estimated selling costs, or approximately $40 million, during the third quarter of 2012. These newly identified

139

bankruptcy filings resulted in an increase to net charge-offs and provision for loan losses of $50 million for the
year ended December 31, 2012, with approximately 80% related to prior years.

During the years ended December 31, 2012, 2011 and 2010, the Company agreed to settlements with five
particular originators specific to loans sold to the Company by those originators. One-time payments were made
to the Company to satisfy in full all pending and future repurchase requests with those specific originators.
During the years ended December 31, 2012, 2011 and 2010, the Company applied $11.2 million, $46.0 million
and $24.6 million, respectively, as recoveries to the allowance for loan losses, resulting in a corresponding
reduction in net charge-offs as well as provision for loan losses.

Impaired Loans—Troubled Debt Restructurings

TDRs include loan modifications completed under the Company’s programs that involve granting an
economic concession to a borrower experiencing financial difficulty. Beginning in the fourth quarter of
December 31, 2012, loans that have been charged off based on the estimated current value of the underlying
property less estimated selling costs due to bankruptcy notification were also considered TDRs. Upon being
classified as a TDR, such loan is categorized as an impaired loan and is considered impaired until maturity
regardless of whether the borrower performs under the terms of the loan. Impairment on TDRs is measured on an
individual basis.

TDR loan 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. TDRs are
classified as nonperforming until six consecutive payments have been made.

The unpaid principal balance in one- to four-family TDRs was $1.2 billion and $968.2 million at
December 31, 2012 and 2011, respectively. For home equity loans, the recorded investment in TDRs represents
the unpaid principal balance. As of December 31, 2012 the Company had $216.6 million recorded investment of
TDRs that had been charged-off due to bankruptcy notification, $119.2 million of which were classified as
performing.

The following table shows a summary of the Company’s recorded investment in TDRs that were on accrual
and nonaccrual status, in addition to the recorded investment of TDRs as of December 31, 2012 and 2011
(dollars in thousands):

December 31, 2012

One- to four-family
Home equity

Accrual TDRs(1)

Current(2)

30-89 Days
Delinquent

90+ Days
Delinquent

Recorded
Investment in TDRs

Nonaccrual TDRs

$785,199
196,199

$142,373
35,750

$118,834
17,634

$182,719
27,440

$1,229,125
277,023

Total

$981,398

$178,123

$136,468

$210,159

$1,506,148

December 31, 2011

One- to four-family
Home equity

$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

(1) Represents TDRs that are current and have made six or more consecutive payments.
(2) Represents TDRs that are current but have not yet made six consecutive payments and certain junior lien TDRs that have a delinquent

senior lien.

140

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, 2012 and 2011 (dollars in
thousands):

One- to four-family
Home equity

Total

Average Recorded Investment

Interest Income Recognized

December 31,

2012

2011

2010

2012

2011

2010

$1,054,304
296,760

$ 770,943
455,422

$399,306
460,892

$31,109
11,559

$27,034
9,981

$13,498
5,209

$1,351,064

$1,226,365

$860,198

$42,668

$37,015

$18,707

Included in the allowance for loan losses was a specific allowance of $171.4 million and $320.1 million that
was established for TDRs at December 31, 2012 and 2011, 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, 2012 and 2011 (dollars in thousands):

December 31, 2012

December 31, 2011

Recorded
Investment
in TDRs

Specific
Valuation
Allowance

Net Investment
in TDRs

Recorded
Investment
in TDRs

Specific
Valuation
Allowance

Net Investment
in TDRs

$ 503,557
$ 185,133

$89,684
$81,690

$ 413,873
$ 103,443

$557,297
$424,834

$101,188
$218,955

$456,109
$205,879

With a recorded allowance:
One- to four-family
Home equity

Without a recorded allowance:(1)

One- to four-family
Home equity

$ 725,568
91,890
$

$ —
$ —

$ 725,568
91,890
$

$415,656
$ 21,105

$ —
$ —

$415,656
$ 21,105

Total:

One- to four-family
Home equity

$1,229,125
$ 277,023

$89,684
$81,690

$1,139,441
$ 195,333

$972,953
$445,939

$101,188
$218,955

$871,765
$226,984

(1) Represents loans where the discounted cash flow analysis or collateral value is equal to or exceeds the recorded investment in the loan.

Troubled Debt Restructurings — Loan Modifications

The Company has loan modification programs that focus on the mitigation of potential losses in the one- to
four-family and home equity mortgage loan portfolio. The Company currently does not have an active loan
modification program for consumer and other loans. 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. Trial modifications are classified immediately as TDRs and continue to be
reported as delinquent until the successful completion of the trial period, which is typically 90 days. The loan
then becomes a permanent modification reported as current but remains on nonaccrual status until six
consecutive payments have been made.

141

The vast majority of the Company’s TDR loan modifications 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 modification had an
interest rate reduction with principal forgiven and an extension, the modification 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 by major class, and the financial impact of modifications
during the years ended December 31, 2012 and 2011 (dollars in thousands):

Year Ended December 31, 2012

Interest Rate Reduction

Number of
Loans

Principal
Forgiven

Principal
Deferred

Re-age/
Extension/
Interest
Capitalization

Other with
Interest Rate
Reduction

Other

Total

One- to four-family
Home equity

614
638

$52,612
276

$36,836
118

$131,588
4,933

$ 11,856
38,838

$19,455
9,440

$252,347
53,605

Total

1,252

$52,888

$36,954

$136,521

$ 50,694

$28,895

$305,952

Year Ended December 31, 2011

Interest Rate Reduction

Number of
Loans

Principal
Forgiven

Principal
Deferred

Re-age/
Extension/
Interest
Capitalization

Other with
Interest Rate
Reduction

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

One- to four-family
Home equity

Total

Year Ended December 31, 2012

Financial Impact

Principal
Forgiven

Pre-Modification Weighted
Average Interest Rate

Post-Modification Weighted
Average Interest Rate

$16,624
97

$16,721

5.9%
4.4%

2.3%
1.5%

Year Ended December 31, 2011

Financial Impact

Principal
Forgiven

Pre-Modification Weighted
Average Interest Rate

Post-Modification Weighted
Average Interest Rate

6.1%
4.7%

2.6%
1.8%

$9,308
646

$9,954

142

The Company considers modifications that become 30 days past due to have experienced a payment default.
The following table shows the recorded investment of modifications at December 31, 2012 and 2011 that
experienced a payment default within 12 months after the modification for the years ended December 31, 2012
and 2011 (dollars in thousands):

One- to four-family(1)
Home equity(2)

Total

Year Ended December 31,

2012

2011

Number of
Loans

Recorded
Investment

Number of
Loans

Recorded
Investment

260
367

627

$100,182
17,809

$117,991

310
866

$126,172
65,331

1,176

$191,503

(1) As of the year ended December 31, 2012 and 2011, $28.1 million and $34.1 million, respectively, 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 the year ended December 31, 2012 and 2011, $5.8 million and $17.2 million, respectively, of the recorded investment in home

equity loans that had a payment default in the trailing 12 months were classified as current.

The delinquency status is the primary measure the Company uses to evaluate the performance of TDR loan
modifications. The following table shows the TDR loan modifications by delinquency category as of
December 31, 2012 and 2011 (dollars in thousands):

December 31, 2012
One- to four-family
Home equity

Total

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

Total

Modifications
Current

Modifications
30-89 Days
Delinquent

Modifications
90-179 Days
Delinquent

Modifications
180+ Days
Delinquent

Recorded
Investment in
Modifications

$ 838,020
195,021

$105,142
15,107

$1,033,041

$120,249

$ 767,303
351,609

$ 88,195
51,433

$1,118,912

$139,628

$43,905
6,173

$50,078

$33,224
34,472

$67,696

$79,102
7,118

$1,066,169
223,419

$86,220

$1,289,588

$84,231
8,425

$ 972,953
445,939

$92,656

$1,418,892

143

NOTE 6—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, forward-starting 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 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 at December 31, 2012 and 2011 (dollars in thousands):

Notional

Asset(1)

Liability(2)

Net(3)

Fair Value

December 31, 2012

Interest rate contracts:
Cash flow hedges:

Purchased options
Pay-fixed rate swaps

Total cash flow hedges

Fair value hedges:

Pay-fixed rate swaps

Total derivatives designated as hedging

instruments(4)

$2,325,000
2,205,000
4,530,000

$13,391

—
13,391

$
(310,079)
(310,079)

— $ 13,391
(310,079)
(296,688)

514,180

1,343

(18,385)

(17,042)

$5,044,180

$14,734

$(328,464) $(313,730)

December 31, 2011

Interest rate contracts:
Cash flow hedges:

Purchased options
Pay-fixed rate swaps

Total cash flow hedges

Fair value hedges:

Pay-fixed rate swaps
Receive-fixed rate swaps

Total fair value hedges

Total derivatives designated as hedging

instruments(4)

$2,625,000
2,165,000
4,790,000

$33,959

—
33,959

$
(281,071)
(281,071)

— $ 33,959
(281,071)
(247,112)

1,093,860
725,950
1,819,810

—
32,575
32,575

(77,132)
—
(77,132)

(77,132)
32,575
(44,557)

$6,609,810

$66,534

$(358,203) $(291,669)

(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, 2012 and 2011.

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).

144

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, 2012, 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) for the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):

For the Year Ended December 31,

2012

2011

2010

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 losses(1)

$(72,119) $(216,302) $(77,724)
$(77,731) $ (66,847) $(47,774)
(265)
$

(480) $

(491) $

(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
$129.1 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 hedged items affect
earnings. The maximum length of time over which transactions are hedged is 10 years.

The following table shows the balance in accumulated other comprehensive loss attributable to active and

discontinued cash flow hedges at December 31, 2012 and 2011 (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

December 31,

2012

2011

$(247,983)
(204,358)

$(279,091)
(178,862)

$(452,341)

$(457,953)

The following table shows the balance in accumulated other comprehensive loss attributable to cash flow

hedges by type of hedged item at December 31, 2012 and 2011 (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

145

December 31,

2012

2011

$(579,763)
(146,253)
7,854
116

(718,046)
265,705
$(452,341)

$(595,202)
(154,082)
15,772
(655)

(734,167)
276,214
$(457,953)

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) for the
years ended December 31, 2012, 2011 and 2010 (dollars in thousands):

Year Ended December 31,

2012

2011

Hedging
Instrument

Hedged
Item

Hedge
Ineffectiveness(1)

Hedging
Instrument

Hedged
Item

Hedge
Ineffectiveness(1)

$(17,831) $ 16,367

$(1,464)

$(144,968) $142,242

$(2,726)

(7,303)
14,146

6,745
(18,824)

(558)
(4,678)

(51,557)
52,658

48,835
(49,109)

(2,722)
3,549

Agency debentures
Agency mortgage-backed

securities
FHLB advances

Total gains (losses)

included in earnings

$(10,988) $ 4,288

$(6,700)

$(143,867) $141,968

$(1,899)

Year Ended December 31,

2010

Hedging
Instrument

Hedged
Item

Hedge
Ineffectiveness(1)

$ 55,743
(18,099)
(1,714)

$(57,816)
19,456
1,714

$(2,073)
1,357
—

U.S. Treasury securities and

agency debentures

FHLB advances
Corporate debt

Total gains (losses)

included in earnings

$ 35,930

$(36,646)

$ (716)

(1) Reflected in the gains on loans and securities, net line item on the consolidated statement of income (loss).

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

146

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 $446.9 million of its
mortgage-backed securities as collateral
liability positions to
counterparties as of December 31, 2012.

related to its derivative contracts in net

The Company’s credit risk analysis for derivative instruments also considered the credit loss exposure on
derivative instruments in net asset positions. During the year ended December 31, 2012, 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 $323.3 million as
of December 31, 2012. 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, $446.9 million as of
December 31, 2012, exceeded derivative instruments in net liability positions at the counterparty level by $123.6
million.

NOTE 7—PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following assets at December 31, 2012 and 2011 (dollars in

thousands):

Software
Leasehold improvements
Equipment
Buildings
Furniture and fixtures
Land

December 31, 2012

December 31, 2011

Accumulated
Depreciation
and
Amortization

Net
Amount

Gross
Amount

Accumulated
Depreciation
and
Amortization

Net
Amount

$(353,696) $157,788
34,671
38,328
50,006
3,950
3,427

(70,791)
(65,353)
(21,921)
(19,261)
—

$461,691
102,133
92,030
71,927
23,534
3,427

$(296,529) $165,162
36,439
37,778
52,061
4,826
3,427

(65,694)
(54,252)
(19,866)
(18,708)
—

Gross
Amount

$511,484
105,462
103,681
71,927
23,211
3,427

Total

$819,192

$(531,022) $288,170

$754,742

$(455,049) $299,693

Depreciation and amortization expense related to property and equipment was $90.6 million, $89.6 million

and $87.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Software includes capitalized internally developed software costs. These costs were $55.2 million, $54.8
million and $54.6 million for the years ended December 31, 2012, 2011 and 2010, respectively. Completed
projects are carried at cost and are amortized on a straight-line basis over their estimated useful lives of four

147

years. Amortization for the capitalized amounts was $57.5 million, $54.2 million and $48.3 million for the years
ended December 31, 2012, 2011 and 2010, respectively. Software at December 31, 2012 and 2011 also included
$21.9 million and $48.1 million, respectively, of internally developed software in the process of development for
which amortization has not begun.

NOTE 8—GOODWILL AND OTHER INTANGIBLES, NET

Goodwill

The activity in the carrying value of the Company’s goodwill, which is all assigned to the trading and

investing segment, is outlined in the following table for the periods presented (dollars in thousands):

Balance at December 31, 2010
Write off of goodwill related to exit activities

Balance at December 31, 2011
Activity

Balance at December 31, 2012

Trading & Investing
Goodwill

$1,939,976
(5,744)

1,934,232

—

$1,934,232

No goodwill was assigned to reporting units within the balance sheet management segment for the years
ended December 31, 2012 and 2011. As of December 31, 2012, 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, 2012 were $101.2 million, which reduced the goodwill balance to zero during the year ended
December 31, 2007.

Other Intangibles, Net

Other intangible assets with finite lives, which are primarily amortized on an accelerated basis, consisted of
customer lists at December 31, 2012 and 2011. The following table outlines the original and remaining weighted
average useful lives and the gross amount, accumulated amortization and net amount of customer lists at
December 31, 2012 and 2011 (dollars in thousands):

Customer Lists

Weighted Average
Original
Useful Life
(Years)

Weighted Average
Remaining
Useful Life
(Years)

Gross Amount

Accumulated
Amortization Net Amount

December 31, 2012
December 31, 2011

21
21

13
14

$496,624
$496,624

$(236,002)
$(210,819)

$260,622
$285,805

Assuming no future impairments of customer lists or additional acquisitions or dispositions, annual

amortization expense will be as follows (dollars in thousands):

Years ending December 31,

2013
2014
2015
2016
2017
Thereafter

Total future amortization expense

148

$ 24,269
23,244
21,764
21,109
20,489
149,747

$260,622

Amortization expense of other intangibles was $25.2 million, $26.2 million, and $28.5 million for the years

ended December 31, 2012, 2011 and 2010, respectively.

NOTE 9—OTHER ASSETS

Other assets consisted of the following at December 31, 2012 and 2011 (dollars in thousands):

Deferred tax assets, net
Deposits paid for securities borrowed
Bank owned life insurance policy(1)
Accrued interest receivable
Brokerage operational related receivables
Real estate owned and repossessed assets
Other investments
Third party loan servicing receivable
Other prepaids
Derivative assets
Prepaid FDIC insurance premiums
Other

December 31,

2012

2011

$1,416,203
407,331
292,699
139,620
76,468
71,155
42,244
38,864
32,109
14,890
—
179,338

$1,578,704
266,045
287,129
151,932
69,524
87,615
40,317
40,964
33,359
66,534
90,658
247,892

Total other assets

$2,710,921

$2,960,673

(1) Represents the cash surrender value.

NOTE 10—DEPOSITS

Deposits are summarized as follows (dollars in thousands):

Sweep deposits(1)
Complete savings deposits
Checking deposits
Other money market and savings deposits
Time deposits(2)

Total deposits(3)

Amount

December 31,

Weighted-Average Rate

December 31,

2012

2011

2012

2011

$21,253,611
4,981,615
1,055,422
995,188
106,716

$18,618,954
5,720,758
863,310
1,033,254
223,709

0.05 % 0.08 %
0.01 % 0.15 %
0.03 % 0.10 %
0.01 % 0.15 %
1.75 % 3.01 %

$28,392,552

$26,459,985

0.05 % 0.12 %

(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.
Time deposits represent certificates of deposit and brokered certificates of deposit.

(2)

(3) As of December 31, 2012 and 2011, the Company had $113.1 million and $89.2 million in non-interest bearing deposits, respectively.

149

At December 31, 2012, scheduled maturities of time deposits were as follows (dollars in thousands):

Years ending December 31,
2013
2014
2015
2016
2017
Thereafter

Subtotal
Unamortized discount, net

Total time deposits

$ 64,676
14,183
18,443
5,108
3,944
366

106,720
(4)

$106,716

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,

2012

2011

2012

2011

Three months or less
Three through six months
Six through twelve months
Over twelve months

Total certificates of deposit

$ 1,421
2,666
5,412
4,019

$ — $ — $ —
—
2,105
1,450

4,490
22,683
9,702

523
968
266

$13,518

$36,875

$1,757

$3,555

150

NOTE 11—SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FHLB ADVANCES

AND OTHER BORROWINGS

Securities sold under agreements to repurchase, FHLB advances and other borrowings at December 31,

2012 and 2011 are shown in the following table (dollars in thousands):

FHLB Advances and
Other Borrowings

Repurchase
Agreements(1)

FHLB
Advances

Other

Total

Weighted
Average
Interest Rate

Years Ending December 31,

2013
2014
2015
2016
2017
Thereafter

Subtotal

Fair value hedge adjustments
Deferred costs

Total other borrowings

at December 31, 2012

Total other borrowings

at December 31, 2011

$3,402,433
352,228
200,000
200,000
300,000
—

4,454,661
—
—

$ 170,000

—
100,000
250,000
400,000
—

920,000
37,121
(125,372)

1,238
210
—
—
—

427,719

429,167
—
—

0.45%
0.75%
1.28%
1.68%
0.76%
2.99%

0.83%

$3,573,671
352,438
300,000
450,000
700,000
427,719

5,803,828
37,121
(125,372)

$4,454,661

$ 831,749

$429,167

$5,715,577

0.83%

$5,015,499

$2,302,695

$434,240

$7,752,434

1.74%

(1)

The maximum amount at any month end for repurchase agreements was $5.0 billion and $5.9 billion for the year ended December 31,
2012 and 2011.

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, 2012, there were no counterparties with
whom the Company’s amount of risk exceeded 10% of its shareholders’ equity. During the year ended
December 31, 2012, the Company paid down in advance of maturity $100 million of its fixed-rate repurchase
agreements for which losses on early extinguishment of debt of $8.2 million was recorded. This loss was
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.

Below is a summary of repurchase agreements and collateral associated with the repurchase agreements at

December 31, 2012 (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

0.42% $2,009,097
682,633
0.64%
1,762,931
1.04%

$2,104,931
712,991
1,848,053

$2,155,853
730,216
1,892,702

0.70% $4,454,661

$4,665,975

$4,778,771

151

FHLB Advances and Other Borrowings

FHLB Advances—The Company had $0.7 billion and $0.5 billion in floating-rate and $0.2 billion and $1.8
billion in fixed-rate FHLB advances at December 31, 2012 and 2011, respectively. The floating-rate advances
adjust quarterly based on the LIBOR. During the year ended December 31, 2012, $650.0 million of fixed-rate
FHLB advances were converted to floating-rate for a total cost of approximately $128 million which was
capitalized and will be amortized over the remaining maturities using the effective interest method. In addition,
during the year ended December 31, 2012, the Company paid down in advance of maturity $1.0 billion of its
FHLB advances and recorded $69.1 million in losses on the early extinguishment. This loss was 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.

As a condition of its membership in the FHLB Atlanta, the Company is 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
$26 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
$67.4 million and $140.2 million at December 31, 2012 and 2011, 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, 2012 and 2011, the Company pledged loans with a lendable value of $4.8 billion and $5.0 billion,
respectively, of the one- to four-family and home equity loans as collateral in support of both its advances and
unused borrowing lines.

Other Borrowings—Prior to 2008, ETBH raised capital through the formation of trusts, which sold 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, 2012 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, other borrowings also included $2.3 million of collateral pledged to the Bank by
its derivatives counterparties to reduce credit exposure to changes in market value. The Company did not have
any similar borrowings for the year ended December 31, 2012.

152

NOTE 12—CORPORATE DEBT

Corporate debt at December 31, 2012 and 2011 is outlined in the following table (dollars in thousands):

Face Value

Discount

Fair Value Hedge
Adjustment(1)

Net

December 31, 2012
Interest-bearing notes:

6 3⁄4% Notes, due 2016
6% Notes, due 2017
6 3⁄ 8% Notes, due 2019

Total interest-bearing notes

Non-interest-bearing debt:

$ 435,000
505,000
800,000

(5,738)
(4,601)
(7,336)

1,740,000

(17,675)

0% Convertible debentures, due 2019

42,657

—

$ —
—
—

—

$ 429,262
500,399
792,664

1,722,325

42,657

Total corporate debt

$1,782,657

$ (17,675)

$ —

$1,764,982

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

(1)

The fair value hedge adjustment is related to changes in fair value of the debt while in a fair value hedge relationship.

6 3⁄4% Senior Notes due May 2016 (“6 3⁄4% 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.

The Company used the proceeds from the issuance of the 6 3⁄4% Notes to redeem all of its outstanding 7 3⁄ 8%
senior notes due September 2013 (“7 3⁄ 8% Notes”) including paying the associated redemption premium, accrued
interest and related fees and expenses. The Company recorded a $3.1 million gain on early extinguishment of
debt related to the redemption of the 7 3⁄ 8% Notes for the year ended December 31, 2011.

6% Senior Notes due November 2017 (“6% Notes”) and 6 3⁄ 8% Senior Notes due November 2019 (“6 3⁄ 8%
Notes”)

In November 2012, the Company issued an aggregate principal amount of $505 million in 6% senior notes
is payable

due November 2017 and $800 million in 6 3⁄ 8% senior notes due November 2019. Interest
semi-annually and the notes may be called by the Company at a premium, which declines over time.

153

The Company used the net proceeds from the issuance of the 6% Notes and 6 3⁄ 8% Notes to redeem all of its
outstanding 7 7⁄ 8% senior notes due December 2015 (“7 7⁄ 8% Notes”) and 12 1⁄ 2% springing lien notes due
November 2017 (“12 1⁄ 2% Springing lien notes”), including paying the associated redemption premiums, accrued
interest and related fees and expenses. The Company recorded $256.9 million in losses on early extinguishment
of debt related to the redemption of the 7 7⁄ 8% Notes and 12 1⁄ 2% Springing lien notes for the year ended
December 31, 2012.

0% Convertible Debentures due August 2019 (“0% Convertible Debentures”)

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 “0%
Convertible debentures”) of non-interest-bearing notes due August 2019, in exchange for $1.3 billion principal of
the 12 1⁄ 2% Springing lien notes and $0.4 billion principal of the 8% senior notes due June 2011.

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.

During the years ended December 31, 2012 and 2011, $0.4 million and $660.9 million of the Company’s
convertible debentures were converted into less than 0.1 million and 63.9 million shares of common stock,
respectively. As of December 31, 2012, 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 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.

In June 2011, certain of the Company’s subsidiaries issued guarantees on 6 3⁄4% Notes and 0% Convertible

debentures. 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, 2012, the Company was in compliance with all such maintenance covenants.

154

Future Maturities of Corporate Debt

Scheduled principal payments of corporate debt as of December 31, 2012 were as follows (dollars in

thousands):

Years ending December 31,

2013
2014
2015
2016
2017
Thereafter

Total future principal payments of corporate debt

Unamortized discount

Total corporate debt

—
—
—
435,000
505,000
842,657

1,782,657
(17,675)

$1,764,982

NOTE 13—OTHER LIABILITIES

Other liabilities consisted of the following at December 31, 2012 and 2011 (dollars in thousands):

Deposits received for securities loaned
Derivative liabilities
Income tax-related liabilities
Accounts payable, accrued expenses and other
Other payables to brokers, dealers and clearing organizations
Subserviced loan advances

Total other liabilities

December 31,

2012

2011

$ 735,720
328,504
219,040
203,192
143,180
14,600

$ 505,548
358,203
347,579
335,631
135,094
33,618

$1,644,236

$1,715,673

NOTE 14—INCOME TAXES

The components of income tax expense (benefit) for the years ended December 31, 2012, 2011 and 2010

were as follows (dollars in thousands):

Current:

Federal
State
Foreign

Total current

Deferred:

Federal
State
Foreign

Total deferred

Non-current tax expense

Income tax expense (benefit)

Year Ended December 31,

2012

2011

2010

—
2,428
163

2,591

$ (2,645)
15,651
523

$ (17,393)
6,092
448

13,529

(10,853)

(136,877)
(199)
—

(137,076)

116,104

8,136
(241)
—

7,895

7,205

(24,589)
(61,578)
(32)

(86,199)

122,383

$ (18,381)

$28,629

$ 25,331

155

Non-current tax expense relates to tax expense associated with the reserves for uncertain tax positions. The
federal deferred income tax benefit and tax expense recognized for uncertain tax positions in 2012, was driven
primarily by amended tax returns that were filed during 2012 related to additional tax deductions on the 2009
Debt Exchange. The rest of the federal deferred income tax benefit in 2012 was driven by the loss incurred
during the year.

The following table presents the components of income (loss) before income tax expense (benefit) for the

years ended December 31, 2012, 2011 and 2010 (dollars in thousands):

Domestic
Foreign

Year Ended December 31,

2012

2011

2010

$(135,432)
4,468

$181,959
3,371

$ 7,426
(10,567)

Income (loss) before income tax expense (benefit)

$(130,964)

$185,330

$ (3,141)

Unrecognized Tax Benefits

The following table provides a reconciliation of the beginning and ending amount of unrecognized tax

benefits for the years ended December 31, 2012, 2011 and 2010 (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
Settlements with taxing authorities
Statute of limitations lapses

Unrecognized tax benefits, end of period

Year Ended December 31,

2012

2011

2010

$377,405
130,443
8,425
(23,167)
(99)
(1,034)

$281,666
4,174
152,497
(59,315)
(422)
(1,195)

$ 58,696
165,834
62,752
(1,517)
(3,448)
(651)

$491,973

$377,405

$281,666

The unrecognized tax benefit

increased $114.6 million to $492.0 million during the year ended
December 31, 2012. The majority of additional unrecognized tax benefit recorded during 2012 is due to amended
tax returns filed related primarily to additional tax deductions on the 2009 Debt Exchange. At December 31,
2012, $247.3 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.

In 2012, the Internal Revenue Service sent an examination notification to the Company related to its 2009
and 2010 federal tax returns. While the Company cannot predict the outcome of the examination, it believes that
adequate provision has been made for any of the Company’s uncertain tax positions. 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 positions in which it is more than fifty percent likely of being sustained on effective settlement.

156

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

2006-2012
2009-2012
2004-2012
2005-2012

(1) Major state tax jurisdictions include 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, legislation could favorably impact certain of the
Company’s unrecognized tax benefits. Such events would generally reduce the Company’s unrecognized tax
benefits because the tax positions are sustained, by as much as $1.3 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 $15.4 million and $11.6 million
as of December 31, 2012 and 2011, respectively. The tax expense for the year ended December 31, 2012 includes
an increase in the accrual for interest and penalties of $3.8 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. The temporary differences and tax carry forwards that created
deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are summarized in the following
table (dollars in thousands):

Deferred tax assets:

Reserves and allowances, net
Net operating losses
Deferred compensation
Tax credits
Basis differences in investments
Restructuring reserve and related write-downs
Capitalized interest
Other

Total deferred tax assets

Valuation allowance

Total deferred tax assets, net of valuation

allowance

Deferred tax liabilities:

Depreciation and amortization
Mark to market
Other

Total deferred tax liabilities

December 31,

2012

2011

$1,015,800
780,883
41,572
28,775
17,417
2,162
—
—

$1,216,487
567,774
44,512
16,169
67,738
15,092
65,767
27,109

1,886,609
(97,837)

2,020,648
(73,533)

1,788,772

1,947,115

(309,985)
(52,730)
(9,854)

(260,600)
(107,811)

—

(372,569)

(368,411)

Net deferred tax asset

$1,416,203

$1,578,704

157

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. For the three-year period ended December 31, 2012, the Company
was no longer in a cumulative book loss position. As of December 31, 2012, the Company did not establish a
valuation allowance against its federal deferred tax assets as it believes that it is more likely than not that all of
these assets will be realized. Approximately half of existing federal deferred tax assets are not related to net
operating losses and therefore, have no expiration date. The Company ended 2012 with $1,956.3 million of gross
federal net operating losses, the majority of which will expire within the next 15 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 nine years, including through uncertain economic and regulatory environments. The core business is
driven by brokerage customer activity and includes trading, brokerage cash, margin lending, retirement and
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 five years ago. As a result, the losses have continued to decline significantly and the balance
sheet management segment became profitable in 2012. 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 four consecutive years, down 78% 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 $97.8 million and $73.5 million at December 31, 2012 and 2011,
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, 2012, the Company had certain gross foreign country net operating loss carry
forwards and other foreign country temporary differences of approximately $144.5 million for which a
deferred tax asset of approximately $35.4 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 $35.4 million against such deferred
tax assets at December 31, 2012.

• At December 31, 2012, the Company had gross state net operating loss carry forwards that expire
between 2022 and 2032 in several states of $3.6 billion, most of which are subject to reduction by
apportionment changes. A deferred tax asset of approximately $136.5 million has been established
related to these state net operating loss carry forwards, temporary differences and other tax attributes
with a valuation allowance of $52.2 million against such deferred tax assets at December 31, 2012.

158

• At December 31, 2012, the Company had charitable contribution carry forwards of $27.4 million that
expire by 2015. A deferred tax asset of approximately $10.2 million was established with a
corresponding $10.2 million valuation allowance as it is more likely than not that these contributions
will expire unused.

The Company intends to permanently reinvest $16.0 million of undistributed earnings and profits in certain
foreign subsidiaries. As a result, the Company has not recorded $6.4 million of deferred income taxes on those
earnings at December 31, 2012.

Effective Tax Rate

The effective tax rate differed from the federal statutory rate as summarized in the following table for the

years ended December 31, 2012, 2011 and 2010:

Year Ended December 31,

2012

2011

2010

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
Change in valuation allowance
2009 Debt Exchange
Tax credits
California state tax legislative changes
Estimated reserve for uncertain tax positions
Deferred tax adjustments
Disallowed losses on early extinguishment of debt
Tax on undistributed earnings and profits in certain foreign subsidiaries
Other
Liquidation of a foreign subsidiary

(35.0)%35.0 % (35.0)%
81.0
9.1
(11.8)
47.3
0.3
(1.1)
(19.9)
(0.3)
(0.4)
6.7
10.3
387.3
(1.8) 236.5
6.9
—
(79.5)
—
140.6
—
—
79.4
(31.4)

(19.7) —
(12.2)
19.2 —
3.9
9.1
8.4 —
7.4 —
2.1
2.5
(1.0)
2.4
— (33.3) —

(5.3)

Effective tax rate

(14.0)%15.4 % 806.3 %

Tax Ownership Change

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 2009 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 $1,886.3 million. This amount includes $479.7 million in federal NOLs that were recorded in the
third quarter of 2012 due to amended tax returns filed related primarily to additional tax deductions on the 2009
Debt Exchange and additional tax losses on bad debts. Section 382 imposes an annual limitation 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.

159

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 federal 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
federal NOLs, which were approximately $1,886.3 million, have a statutory carry forward period of 20 years (the
majority of which expire in 15 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 15—SHAREHOLDERS’ EQUITY

The activity in shareholders’ equity during the year ended December 31, 2012 is summarized in the

following table (dollars in thousands):

Common Stock /
Additional Paid-In
Capital

Accumulated Deficit /
Other Comprehensive
Loss

Beginning balance, December 31, 2011

$7,309,716

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

—
355
—
—
12,047

$(2,381,766)
(112,583)

—
68,642
5,612
2,447

Total

$4,927,950
(112,583)
355
68,642
5,612
14,494

Ending balance, December 31, 2012

$7,322,118

$(2,417,648)

$4,904,470

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

currency translation.

Accumulated Other Comprehensive Loss

The following tables present after-tax changes in each component of accumulated other comprehensive loss

for the years ended December 31, 2012, 2011 and 2010 (dollars in thousands):

Beginning balance, December 31, 2011

Net change

Ending balance, December 31, 2012

Available-for-sale
Securities

Cash Flow Hedging
Instruments

Foreign Currency
Translation

Total

$(457,953)
5,612

$(452,341)

$2,994
2,447

$5,441

$(386,629)
76,701

$(309,928)

$ 68,330
68,642

$136,972

160

Beginning balance, December 31, 2010

Net change

Available-for-sale
Securities

Cash Flow
Hedging
Instruments

Foreign
Currency
Translation

Total

$(131,313)
199,643

$(308,498)
(149,455)

$ 1,171
1,823

$(438,640)
52,011

Ending balance, December 31, 2011

$ 68,330

$(457,953)

$ 2,994

$(386,629)

Beginning balance, December 31, 2009

Net change

Available-for-sale
Securities

Cash Flow
Hedging
Instruments

Foreign
Currency
Translation

Total

$(131,073)
(240)

$(278,548)
(29,950)

$ 5,491
(4,320)

$(404,130)
(34,510)

Ending balance, December 31, 2010

$(131,313)

$(308,498)

$ 1,171

$(438,640)

Conversions of Convertible Debentures

Preferred Stock

The Company has 1.0 million shares authorized in preferred stock. None were issued and outstanding at
December 31, 2012 and 2011. 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.

NOTE 16—EARNINGS (LOSS) PER SHARE

The following table is a reconciliation of basic and diluted earnings (loss) per share for the years ended

December 31, 2012, 2011 and 2010 (in thousands, except per share amounts):

Basic:

Net income (loss)

Basic weighted-average shares outstanding

Basic earnings (loss) per share

Diluted:

Net income (loss)

Basic weighted-average shares outstanding

Effect of dilutive securities:

Weighted-average convertible debentures
Weighted-average options and restricted stock issued to

employees

Diluted weighted-average shares outstanding

Diluted earnings (loss) per share

161

Year Ended December 31,

2012

2011

2010

$(112,583) $156,701

$ (28,472)

285,748

267,291

211,302

(0.39) $

0.59

(0.13)

$(112,583) $156,701

$ (28,472)

285,748

267,291

211,302

—

21,924

607

—

285,748

289,822

211,302

(0.39) $

0.54

(0.13)

The Company excluded the following shares from the calculations of diluted earnings (loss) per share for
the years ended December 31, 2012, 2011 and 2010 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

NOTE 17—REGULATORY REQUIREMENTS

Registered Broker-Dealers

Year Ended
December 31,

2012

2011

2010

4.1 N/A 77.2
0.8
0.4 N/A
2.8
3.7
2.5

7.0

3.7

80.8

The Company’s largest 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 other broker-dealers,
to capital
including its international broker-dealer subsidiaries located in Europe and Asia, are subject
requirements determined by their respective regulators.

As of December 31, 2012 and 2011, all of the Company’s broker-dealer subsidiaries met minimum net
capital requirements. Total required net capital was $0.1 billion at both December 31, 2012 and 2011. In
addition, the Company’s broker-dealer subsidiaries had excess net capital of $0.7 billion at both December 31,
2012 and 2011. The tables below summarize the minimum excess capital requirements for the Company’s
broker-dealer subsidiaries at December 31, 2012 and 2011 (dollars in thousands):

December 31, 2012:
E*TRADE Clearing LLC(1)
E*TRADE Securities LLC(1)
G1 Execution Services, LLC(2)
Other broker-dealers

Total

December 31, 2011:
E*TRADE Clearing LLC(1)
E*TRADE Securities LLC(1)
G1 Execution Services, LLC(2)
Other 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.

162

Required Net
Capital

Net Capital

Excess Net
Capital

$123,656
250
1,283
4,639

$658,968
79,318
10,598
36,070

$ 535,312
79,068
9,315
31,431

$129,828

$784,954

$ 655,126

$104,804
250
1,000
9,183

$587,819
145,423
24,921
32,157

$ 483,015
145,173
23,921
22,974

$115,237

$790,320

$ 675,083

Banking

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 meet
minimum total capital, Tier 1 capital and Tier 1 leverage ratios. As shown in the table below, at both
December 31, 2012 and 2011, E*TRADE Bank was categorized 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. E*TRADE Bank’s actual and required capital amounts and
ratios at December 31, 2012 and 2011 are presented in the table below (dollars in thousands):

December 31, 2012:
Total capital
Tier 1 capital
Tier 1 leverage(1)
December 31, 2011:

Minimum Required to be
Well Capitalized Under
Prompt Corrective
Action Provisions

Actual

Amount

Ratio

Amount

Ratio

Excess Capital

$4,009,540
$3,762,242
$3,762,242

20.61% >$1,945,669 >10.00% $2,063,871
19.34% >$1,167,401 > 6.00% $2,594,841
8.68% >$2,167,136 > 5.00% $1,595,106

Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to adjusted total assets

$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

(1)

In the first quarter of 2012, the Company transitioned from reporting under the OTS reporting requirements to reporting under the OCC
reporting requirements. The OTS Tier 1 capital ratio and OCC Tier 1 leverage ratio are both calculated in the same manner using
adjusted total assets.

163

NOTE 18—LEASE ARRANGEMENTS

The Company has non-cancelable operating leases for facilities through 2022. Future minimum lease
payments and sublease proceeds under these leases with initial or remaining terms in excess of one year,
including leases involved in facility restructurings, are as follows (dollars in thousands):

Years ending December 31,

2013
2014
2015
2016
2017
Thereafter

Minimum Lease
Payments

Sublease
Proceeds

Net Lease
Commitments

$ 24,287
24,431
23,114
21,437
19,948
58,449

$(2,805)
(2,889)
(285)
—
—
—

$ 21,482
21,542
22,829
21,437
19,948
58,449

Total future minimum lease payments

$171,666

$(5,979)

$165,687

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 $22.6 million, $19.6 million and $22.6 million
for the years ended December 31, 2012, 2011 and 2010, 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 19—COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS

Legal Matters

Litigation Matters

164

commenced on February 21 and 22, 2012 and concluded on June 12, 2012. The parties await decision on whether
there will be a second phase of this bench trial. The Company will continue to defend itself vigorously.

165

within 30 of final approval of that order. Tate and Avakian filed an amended complaint on January 23, 2013,
adding an additional claim under California law. The Company will continue to defend itself vigorously in this
matter.

166

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 OCC by dissatisfied customers or others are investigated by such
regulators, and may, if pursued, result in formal claims being filed against the Company by customers or

167

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.

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 offered 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 NASAA whereby E*TRADE
Securities LLC offered 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 which E*TRADE
Securities LLC 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 offered to purchase (or offered 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

168

or before February 13, 2008, if such auction rate securities had 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, 2012, no
existing Colorado customers held any auction rate securities, and the total amount of auction rate securities held
by E*TRADE Securities LLC customers nationwide was approximately $2.6 million. The Company recorded an
estimated liability of $48 million during the year ended December 31, 2011. During the second quarter of 2012,
the Company recorded a benefit of $10.2 million related to a reduction in the estimated liability as a result of the
completion of the Purchase Offer which expired on May 15, 2012. The estimated liability 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 estimated liability also included penalties and other
estimated settlement costs. The agreement included the resolution of all material individual auction rate securities
arbitrations and litigations.

Insurance

169

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.

Estimated Liabilities

For all legal matters, an estimated liability is established in accordance with the loss contingencies
accounting guidance. Once established, the estimated liability is adjusted based on available information when an
event occurs requiring an adjustment.

Commitments

In the normal course of business, the Company makes various commitments to extend credit and incur
contingent liabilities that are not reflected in the consolidated balance sheet. Significant changes in the economy
or interest rates may influence the impact that these commitments and contingencies have on the Company in the
future.

Loans

The Company historically provided access to real estate loans for its customers through a third party
company and in the fourth quarter of 2012, the Company ceased providing this access to its customers. The
Company structured this arrangement
to minimize the assumption of any of the typical risks commonly
associated with mortgage lending. The third party company that provided this product performed all processing
and underwriting of these loans. Shortly after closing, the third party company purchased the loans from the
Company and is responsible for the credit risk associated with these loans. The Company had $1.0 million in
commitments to sell loans and no commitments to originate or purchase loans at December 31, 2012.

Other Investments

The Company has investments in low-income housing tax credit partnerships and other limited partnerships.
The Company had $4.4 million in commitments to fund low income housing tax credit partnerships and other
limited partnerships as of December 31, 2012.

Securities, Unused Lines of Credit and Certificates of Deposit

At December 31, 2012,

the Company had commitments to purchase $0.3 billion in securities and
commitments to sell $0.3 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 $0.6 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.

170

Prior to 2008, ETBH raised capital through the formation of trusts, which sold 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 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 subordinated debentures issued by
ETBH.

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, 2012, management estimated that the maximum potential liability under
this arrangement, including the current carrying value of the trusts, was equal to approximately $436.6 million or
the total face value of these securities plus dividends, which may be unpaid at the termination of the trust
arrangement.

NOTE 20—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; loans previously originated by the Company or purchased from
third parties; customer cash and deposits; and credit, 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. The balance sheet management segment utilizes the vast majority of
customer cash and deposits and compensates the trading and investing segment via a market-based transfer
pricing arrangement, which is eliminated in consolidation. Customer cash and deposits utilized by the balance
sheet management segment include retail deposits and customer payables.

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

Income (loss) before other income (expense) and income

taxes

Total other income (expense)

Income (loss) before income taxes

Income tax benefit

Net loss

171

Year Ended December 31, 2012

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Total

$ 640,470
622,431

$444,591
192,202

4
(202)

$1,085,065
814,431

1,262,901
—
769,194

636,793
354,637
220,605

(198)
—
172,286

1,899,496
354,637
1,162,085

493,707
—

61,551
—

(172,484)
(513,738)

382,774
(513,738)

$ 493,707

$ 61,551

$(686,222)

(130,964)

(18,381)

$ (112,583)

Net operating interest income
Total non-interest income

Total net revenue
Provision for loan losses
Total operating expense

Income (loss) before other income (expense) and income

taxes

Total other income (expense)

Income (loss) before income taxes

Income tax expense

Net income

Net operating interest income
Total non-interest income

Total net revenue
Provision for loan losses
Total operating expense

Income (loss) before other income (expense) and income

taxes

Total other income (expense)

Income (loss) before income taxes

Income tax expense

Net loss

Segment Assets

As of December 31, 2012
As of December 31, 2011

Year Ended December 31, 2011

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Total

$ 746,047
700,845

$473,891
115,908

21
(113)

$1,219,959
816,640

1,446,892
—
825,940

589,799
440,614
238,424

(92)
—
170,540

2,036,599
440,614
1,234,904

620,952
—

(89,239)
—

(170,632)
(175,751)

361,081
(175,751)

$ 620,952

$ (89,239)

$(346,383)

185,330

28,629

$ 156,701

Year Ended December 31, 2010

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Total

$ 763,015
711,394

$ 463,244
140,265

24
(67)

$1,226,283
851,592

1,474,409
—
752,631

603,509
779,412
215,459

(43)
—
174,487

2,077,875
779,412
1,142,577

721,778
—

(391,362)

—

(174,530)
(159,027)

155,886
(159,027)

$ 721,778

$(391,362)

$(333,557)

(3,141)

25,331

$ (28,472)

Trading and
Investing

Balance Sheet
Management

Corporate/
Other

Total

$9,505,280
$9,608,020

$37,305,600
$37,123,118

$ 575,859
$1,209,314

$47,386,739
$47,940,452

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 any of the years ended
December 31, 2012, 2011 and 2010.

172

NOTE 21—CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

The following presents the Parent’s condensed statement of comprehensive income (loss), balance sheet and

statement of cash flows:

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)

Dividends from subsidiaries
Other revenues

Total net revenue
Total operating expense

Income before other income (expense), income tax benefit, and equity in

income of consolidated subsidiaries

Total other income (expense)
Loss before income tax benefit and equity in income of consolidated

subsidiaries
Income tax benefit
Equity in undistributed income of subsidiaries

Net income (loss)
Other comprehensive income (loss)

Comprehensive income (loss)

Year Ended December 31,

2012

2011

2010

$ 99,432
269,943

$ 160,452
271,607

$ 157,810
254,016

369,375
339,472

432,059
375,083

411,826
353,839

29,903

56,976

57,987

(433,796)

(175,792)

(157,705)

(403,893)
(188,316)
102,994

(112,583)
76,701

(118,816)
(121,141)
154,376

156,701
52,011

(99,718)
(64,109)
7,137

(28,472)
(34,510)

$ (35,882) $ 208,712

$ (62,982)

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

173

December 31,

2012

2011

$ 399,624
142,333
5,558,742
7,984
719,765

$ 478,410
148,184
5,347,942
40,906
737,491

$6,828,448

$6,752,933

$1,764,982
158,996

$1,493,552
331,431

1,923,978

1,824,983

4,904,470

4,927,950

$6,828,448

$6,752,933

CONDENSED STATEMENT OF CASH FLOWS
(In thousands)

Cash flows from operating activities:

Net income (loss)
Adjustments to reconcile net income (loss) to net cash (used in) provided by

$ (112,583) $ 156,701

$ (28,472)

Year Ended December 31,

2012

2011

2010

operating activities:

Depreciation and amortization
Equity in undistributed income from subsidiaries
(Gains) losses on early extinguishment of debt
Other
Net effect of decrease (increase) in other assets
Net effect of (decrease) increase in other liabilities

Net cash (used in) provided by operating activities

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 and springing lien notes
Claims settlement under Section 16(b)
Other

Net cash provided by financing activities

(Decrease) increase in cash and equivalents
Cash and equivalents, beginning of period

Cash and equivalents, end of period

50,026
(102,994)
137,405
45,312
22,446
(178,249)

84,026
(154,376)
(3,091)
16,035
(153,874)
5,697

90,131
(7,137)
—
22,071
(67,819)
121,974

(138,637)

(48,882)

130,748

(26,792)
—
(26,188)
2,845

(50,135)

(23,742)
90,547
(9,500)
(177)

(81,467)
—
(8,332)
11,361

57,128

(78,438)

1,305,000
(1,173,736)

427,331
(425,956)

—
(21,278)

109,986

(78,786)
478,410

—
613

1,988

10,234
468,176

—
—
35,000
3,370

38,370

90,680
377,496

399,624

$ 478,410

$468,176

174

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.

The Company 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, 2012, 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 22—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

2012

2011

First

Second

Third

Fourth

First

Second

Third

Fourth

$489,397 $452,408
$ 62,591 $ 39,510

$ 467,656
$490,035
$ (28,625) $(186,059) $ 45,233

$536,695 $517,619
$ 47,118

$507,275
$ 70,696

$475,010
$ (6,346)

$
$

0.22 $
0.22 $

0.14
0.14

$
$

(0.10) $
(0.10) $

(0.65) $
(0.65) $

0.20
0.16

$
$

0.18
0.16

$
$

0.25
0.24

$
$

(0.02)
(0.02)

During the three months ended March 31, 2012,

the Company recorded an income tax benefit of
$26.3 million related to certain losses on the 2009 Debt Exchange that were previously considered non-
deductible. Through additional research completed during the three months ended March 31, 2012, the Company
identified that a portion of those losses were incorrectly treated as non-deductible in 2009 and are deductible for
tax purposes. As a result of this finding, the Company recorded an income tax benefit and a corresponding
increase to deferred tax assets during the three months ended March 31, 2012.

In the third quarter of 2012, the net loss was due to an increase in the provision for loan losses of

$50 million as a result of newly identified bankruptcy filings.

In the fourth quarter of 2012, the net loss was primarily due to the early extinguishment of all the 12 1⁄ 2%

Springing lien notes and 7 7⁄ 8% Notes that resulted in losses on early extinguishment of debt of $256.9 million.

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.

175

(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, 2012, 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.

Paul T. Idzik became Chief Executive Officer of the Company on January 22, 2013, which follows the
completion of all periods covered by this Annual Report on Form 10-K. Mr. Idzik, with the advice and
assistance of outside securities counsel, met with the Company’s external and internal auditors and its
accounting, finance and legal staff, to review the adequacy of the Company’s disclosure controls and
procedures, its internal control over financial reporting and the disclosures in this Report in order to
reach the conclusions expressed in this Part II, Item 9A and to sign the certifications filed as Exhibits
31.1 and 32.1 hereto.

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).

176

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

3.1

*3.2

4.1

4.2

4.3

4.4

4.5

4.6

4.7

+10.1

10.2

Description

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

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 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.)

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., 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.)

Senior Indenture dated November 14, 2012 between the Company and The Bank of New York
Mellon Trust Company, N.A., as Trustee (includes form of note) (Incorporated by reference to
Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on November 14, 2012.)

First Supplemental Indenture dated November 14, 2012 between the Company and The Bank of
New York Mellon Trust Company, N.A., as Trustee, relating to the 6% Senior Notes due 2017
and 6.375% Senior Notes due 2019 (Incorporated by reference to Exhibit 4.2 of the Company’s
Current Report on Form 8-K filed on November 14, 2012.)

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.)

177

Exhibit
Number

+10.4

+10.5

+10.6

10.7

10.8

10.9

10.10

10.11

10.12

+10.13

+10.14

Description

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 17, 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.)

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.)

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.)

Separation Agreement dated August 9, 2012 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 November 1, 2012.)

*+10.15

Employment Agreement dated January 17, 2013 by and between E*TRADE Financial
Corporation and Paul T. Idzik.

*12.1

*14.1

*21.1

*23.1

*31.1

*31.2

*32.1

Statement of Ratio of Earnings to Fixed Charges.

Code of Professional Conduct.

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

178

Exhibit
Number

Description

*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.

179

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 26, 2013

E*TRADE Financial Corporation
(Registrant)

/s/ Paul T. Idzik

Paul T. Idzik

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/

PAUL T. IDZIK
Paul T. Idzik

Director and Chief Executive Officer
(Principal Executive Officer)

February 26, 2013

/S/ MATTHEW J. AUDETTE

Matthew J. Audette

Chief Financial Officer (Principal
Financial and Accounting Officer)

February 26, 2013

/S/ RONALD D. FISHER

Director

February 26, 2013

Ronald D. Fisher

/S/ KENNETH C. GRIFFIN

Director

February 26, 2013

Kenneth C. Griffin

/S/

FREDERICK W. KANNER
Frederick W. Kanner

/S/

JAMES LAM
James Lam

Director

February 26, 2013

/S/ ROGER A. LAWSON

Director

February 26, 2013

Rodger A. Lawson

/S/

FRANK J. PETRILLI
Frank J. Petrilli

Director

February 26, 2013

180

Signature

Title

Date

Rebecca Saeger

/S/

JOSEPH L. SCLAFANI
Joseph L. Sclafani

/S/

JOSEPH M. VELLI
Joseph M. Velli

Director

February 26, 2013

/S/ DONNA L. WEAVER

Director

February 26, 2013

Donna L. Weaver

/S/

STEPHEN H. WILLARD
Stephen H. Willard

Director

February 26, 2013

181

Exhibit 3.2

AMENDED AND RESTATED BYLAWS
OF
E*TRADE FINANCIAL CORPORATION
(a Delaware corporation)

as of August 8, 2012

ARTICLE 1
STOCKHOLDERS

Section 1.01. Time and Place of Meetings. All meetings of stockholders shall be held at such place within or outside the State of

Delaware and at such time, as may be designated from time to time by the Board of Directors or the Chief Executive Officer or an
officer authorized by the Board of Directors to make such designation.

Section 1.02. Annual Meeting. The annual meeting of stockholders for the election of directors and for the transaction of such
other business as may properly be brought before the meeting shall be held each year on such date and at such time as the Board of
Directors or an officer authorized by the Board of Directors determines. If this date shall fall upon a legal holiday at the place of the
meeting, then such meeting shall be held on the next succeeding business day at the same hour. If no annual meeting is held in
accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient.

Section 1.03. Special Meetings. Special meetings of stockholders may be called only in accordance with Article SIXTH of the

Certificate of Incorporation as it may be amended from time to time (the “Certificate of Incorporation”). Business transacted at any
special meeting of stockholders shall be limited to the purposes stated in the notice.

Section 1.04. Notice of Meetings and Adjourned Meetings; Waivers of Notice.
(a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be

given which shall state the place, if any, date, and hour of the meeting, the means of remote communications, if any, by which
stockholders and proxy holders may be deemed to be present in person and vote at such meeting, the record date for determining the
stockholders entitled to vote at the meeting, if such date is different from the record date for determining stockholders entitled to
notice of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Such notice shall
be given not less than 10 nor more than 60 days before the date on which the meeting is to be held, to each stockholder entitled to
vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting, except as otherwise
provided herein or required by the Delaware General Corporation Law (“Delaware Law”).

(b) When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and
place, if any, thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to
be present in person and vote at such adjourned meeting are announced at the meeting at which the

adjournment is taken; provided, however, that if the adjournment is for more than 30 days, notice of the place, if any, date, and time
of the adjourned meeting and the means of remote communications, if any, by which stockholders and proxy holders may be deemed
to be present in person and vote at such adjourned meeting, shall be given to each stockholder in conformity herewith. If after the
adjournment a new record date for stockholders entitled to vote is fixed for the adjourned meeting, the Board of Directors shall fix a
new record date for notice of such adjourned meeting, which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors and, except as otherwise required by law, shall not be more than 60 nor less than
10 days before the date of such adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of record
entitled to vote at such adjourned meeting as of the record date fixed for notice of such adjourned meeting. At any adjourned meeting,
any business may be transacted which might have been transacted at the original meeting. The officer presiding at any meeting shall
have the power to adjourn the meeting to another place, if any, date and time.

(c) A written waiver of any such notice signed by the person entitled thereto, or a waiver by electronic transmission by the
person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or
convened.

Section 1.05. Quorum. Unless or except to the extent that the presence of a larger number may be required by law, the rules of

any stock exchange upon which the corporation’s securities are listed, the Certificate of Incorporation or these Bylaws, the holders of
a majority of the voting power of all of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a quorum for all purposes. If a quorum should fail to attend
any meeting, the majority of the stockholders present, though less than a quorum, or the officer entitled to preside at or act as
Secretary of the meeting may adjourn the meeting to another place.

Section 1.06. Voting and Proxies. Each stockholder shall have one vote for each share of stock entitled to vote held of record by

such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided in the Certificate of
Incorporation or Delaware Law. Each stockholder of record entitled to vote at a meeting of stockholders may vote in person or may
authorize another person or persons to vote or act for him by written proxy executed by the stockholder or his authorized agent and
delivered to the Secretary of the corporation. No such proxy shall be voted or acted upon after three years from the date of its
execution, unless the proxy expressly provides for a longer period.

Section 1.07. Action At Meeting; Majority Voting; Director Resignation Policy; Contested Elections; Treasury Stock.
(a) In all matters other than the election of directors, when a quorum is present at any meeting, the affirmative vote of the
majority of the voting power present in person or represented by proxy and entitled to vote on the subject matter (or if there are two or
more classes of stock entitled to vote as separate classes, then in the case of each such class, the affirmative vote of the

majority of the voting power of that class present in person or represented by proxy and entitled to vote on the subject matter) shall
decide any matter to be voted upon by the stockholders at such meeting, except when a different vote is required by express provision
of any stock exchange upon which the corporation’s securities are listed, Delaware Law, the Certificate of Incorporation or these
Bylaws.

(b) Subject to the rights of the holders of any series of Preferred Stock, or any other series or class of stock as set forth in the
Certificate of Incorporation, to elect directors under specified circumstances and except as otherwise provided in paragraph (d) of this
Section 1.07, each director shall be elected by the majority of the votes cast with respect to the director’s election at any meeting for
the election of directors at which a quorum is present. For purposes of paragraphs (b) and (c) of this Section 1.07, a majority of votes
cast means that the number of votes “for” a director’s election must exceed 50% of the votes cast with respect to that director’s
election. Any vote “against” a director’s election or “withheld” with respect to a director’s election will count as a vote cast; however,
all “abstentions” and “broker non-votes” will be excluded from the calculation of votes cast with respect to that director’s election.

(c) The Governance Committee of the Board of Directors shall establish procedures under which any director who is not elected

by the majority of the votes cast with respect to the director’s election in an election governed by paragraph (b) of this Section 1.07
shall offer to tender his or her resignation to the Board of Directors.

(d) If, on the last day by which stockholders may submit notice to nominate a person for election as a director pursuant to
Section 1.08(b) of this Article 1, the number of nominees for any election of directors exceeds the number of directors to be elected,
each director shall be elected by the plurality of the votes cast with respect to the director’s election.

Section 1.08. Advance Notice of Stockholder Nominees and Stockholder Business.
(a) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before
the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the proxy materials for the meeting
(or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting
by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder of record of the
corporation (a “Record Stockholder”) at the time of the giving of the notice required in the following paragraph, who is entitled to
vote at the meeting and who has complied with the notice procedures set forth in this Section 1.08(a). For the avoidance of doubt, the
foregoing clause (C) shall be the exclusive means for a stockholder to propose business (other than business included in the
corporation’s proxy materials pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (such act, and the rules
and regulations promulgated thereunder, the “1934 Act”)) at an annual meeting of stockholders.

For business to be properly brought before an annual meeting by a Record Stockholder pursuant to this Section 1.08(a), (a) the
Record Stockholder must have given timely notice thereof in writing to the Secretary of the corporation, (b) any such business must
be a proper matter for stockholder action under Delaware law, and (c) the Record Stockholder and the

beneficial owner, if any, on whose behalf any such proposal or nomination is made, must have acted in accordance with the
representations set forth in the Solicitation Statement required by this Section 1.08(a). To be timely, a Record Stockholder’s notice
must be received by the Secretary at the principal executive offices of the corporation not later than the close of business one hundred
and twenty (120) days nor earlier than the close of business one hundred and fifty (150) days prior to the one year anniversary of the
first mailing of proxy statement relating to the preceding year’s annual meeting; provided, however, that, subject to the last sentence
of this paragraph, in the event that no annual meeting was held in the previous year or the meeting is convened more than thirty
(30) days before or after the one year anniversary of the previous year’s annual meeting, notice by the stockholder to be timely must
be so received not earlier than the close of business one hundred and fifty (150) days prior to the annual meeting and not later than the
close of business one hundred and twenty (120) days prior to the annual meeting or, in the event public announcement of the date of
such annual meeting is first made by the corporation fewer than one hundred and thirty (130) days prior to the date of the annual
meeting, the close of business on the tenth (10th) day following the day on which public announcement of the date of such meeting is
first made by the corporation. In no event shall an adjournment, or postponement of an annual meeting for which notice has been
given, commence a new time period for the giving of a Record Stockholder’s notice.

Such notice shall set forth as to each matter the Record Stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual
meeting, the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the
Bylaws of the corporation, the language of the proposed amendment, (ii) the name and address, as they appear on the corporation’s
books, of the stockholder and any beneficial owner, if any, on whose behalf the proposal is made proposing such business, (iii) as to
the Record Stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (each, a “party”):
(A) the class, series and number of shares of the corporation which are owned beneficially and of record by each such party; (B) any
option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement
payment or mechanism at a price related to any class or series of shares of the corporation or with a value derived in whole or in part
from the value of any class or series of shares of the corporation, whether or not such instrument or right shall be subject to settlement
in the underlying class or series of capital stock of the corporation or otherwise (a “Derivative Instrument”) directly or indirectly
owned beneficially by each such party, and any other direct or indirect opportunity to profit or share in any profit derived from any
increase or decrease in the value of shares of the corporation, (C) any proxy, contract, arrangement, understanding, or relationship
pursuant to which either party has a right to vote, directly or indirectly, any shares of any security of the corporation, (D) any short
interest in any security of the corporation held by each such party (for purposes of these Bylaws, a person shall be deemed to have a
short interest in a security if such person directly or indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the subject security), (E) any
rights to dividends on the shares of the corporation owned beneficially directly or indirectly by each such party that are separated or
separable from the underlying shares of the corporation, (F) any proportionate interest in shares of the corporation or Derivative
Instruments held, directly or indirectly, by a

general or limited partnership in which either party is a general partner or, directly or indirectly, beneficially owns an interest in a
general partner and (G) any performance-related fees (other than an asset-based fee) that each such party is directly or indirectly
entitled to based on any increase or decrease in the value of shares of the corporation of Derivative Instruments, if any, as of the date
of such notice, including without limitation any such interests held by members of each such party’s immediate family sharing the
same household (which information set forth in this paragraph shall be supplemented by such stockholder or such beneficial owner, as
the case may be, not later than 10 days after the record date for determining the stockholders entitled to vote at the meeting; provided,
that if such date is after the date of the meeting, not later than the day prior to the meeting); (iv) any material interest of the
stockholder and any beneficial owner on whose behalf the proposal is made in such business, (v) a representation that the stockholder
is a holder of record or stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the
meeting to propose such business, (vi) a representation that the stockholder or the beneficial owner, if any, intends or is part of a
group which intends to deliver a proxy statement or form of proxy to holders of at least the percentage of the corporation’s
outstanding capital stock required to approve or adopt the proposal or otherwise solicit proxies from stockholders in support of such
proposal (the “Solicitation Statement”), and (vii) any other information that is required to be provided by the stockholder pursuant to
the 1934 Act, in his or her capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include
information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder’s meeting, stockholders
must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 1.08
(a). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of this Section 1.08(a), and, if he or she should so
determine, such chairman shall so declare at the meeting that any such business not properly brought before the meeting shall not be
transacted.

(b) Only persons who are nominated in accordance with the procedures set forth in this Section 1.08(b) shall be eligible for
election as directors. To be properly brought before an annual meeting, nominations must be: (A) specified in the proxy materials for
the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a Record
Stockholder at the time of giving notice who is entitled to vote at the meeting and who has complied with the notice procedures set
forth in this Section 1.08(b).

For nominations to be properly brought before an annual meeting by a Record Stockholder pursuant to clause (C) of the
foregoing paragraph, (a) the Record Stockholder must have given timely notice thereof in writing to the Secretary of the corporation,
and (b) the Record Stockholder and the beneficial owner, if any, on whose behalf such nomination is made, must have acted in
accordance with the representations set forth in the Nomination Solicitation Statement required by this Section 1.08(b). To be timely,
a Record Stockholder’s notice shall be received by the Secretary at the principal executive offices of the corporation within the time
frames set forth in this Section 1.08(b) with respect to stockholder business proposals.

Notwithstanding anything in the preceding sentence to the contrary, in the event that the number of directors to be elected to the
Board of Directors is increased and there has been no public announcement naming all of the nominees for director or indicating the
increase in the size of the Board of Directors made by the corporation at least ten (10) days before the last day a Record Stockholder
may deliver a notice of nomination in accordance with the preceding sentence, a Record Stockholder’s notice required by this
Section 1.08(b) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it
shall be received by the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth
(10 ) day following the day on which such public announcement is first made by the corporation. In no event shall an adjournment, or
postponement of an annual meeting for which notice has been given, commence a new time period for the giving of a Record
Stockholder’s notice.

Such Record Stockholder’s notice shall set forth: (1) as to each person whom the stockholder proposes to nominate for election
or re-election as a director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or
employment of such person, (C) the class, series and number of shares of the corporation which are beneficially owned by such
person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other
information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person’s written consent to
being named in the proxy statement, if any, as a nominee and to serving as a director if elected), and (2) as to such Record
Stockholder or beneficial owner, if any, on whose behalf the nomination is being made, the information required to be provided
pursuant to clauses (ii) and (iii) of the second paragraph of Section 1.08(a), and (3) a statement whether or not the Record Stockholder
or beneficial owner, if any, will deliver a proxy statement and form of proxy to holders of at least the percentage of voting power of
all of the shares of capital stock of the corporation reasonably believed by the Record Stockholder or beneficial holder, as the case
may be, to be sufficient to elect the nominee or nominees proposed to be nominated by the Record Stockholder (such statement, a
“Nomination Solicitation Statement”). At the request of the Board of Directors, any person nominated by a stockholder for election as
a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder’s notice of
nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in
accordance with the procedures set forth in this Section 1.08(b). The chairman of the meeting shall, if the facts warrant, determine and
declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he or she
should so determine, such chairman shall so declare at the meeting, and the defective nomination shall be disregarded. Any nominee
also must submit a statement that, if elected, the director intends to tender, promptly following such person’s election or reelection, an
irrevocable resignation effective upon such person’s failure to receive the required vote for reelection at the next meeting at which
such person would face reelection and upon acceptance of such resignation by the Board of Directors, in accordance with the policies
and procedures adopted by the Governance Committee of the Board of Directors for such purpose pursuant to Section 1.07(c) of this
Article 1.

(c) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected (a) by or at the discretion of the Board of Directors or (b) by any stockholder of record at the time of giving
of notice provided for in this paragraph, who shall be entitled to vote at the meeting and who delivers a written notice to the Secretary
setting forth the information set forth in Section 1.08(b) of this Article I. Nominations by stockholders of persons for election to the
Board of Directors may be made at such a special meeting of stockholders only if such stockholder of record’s notice required by the
preceding sentence shall be received by the Secretary at the principal executive offices of the corporation not later than the close of
business on the later of the 90 day prior to such special meeting or the 10 day following the day on which public announcement is
first made of the date of the special meeting. In no event shall an adjournment, or postponement or a special meeting for which notice
has been given, commence a new time period for the giving of a stockholder of record’s notice. A person shall not be eligible for
election or reelection as a director at a special meeting unless the person is nominated (i) by or at the direction of the Board of
Directors or (ii) by a stockholder of record in accordance with the notice procedures set forth in this Article I.

ARTICLE 2
DIRECTORS

Section 2.01. General Powers. The business and affairs of the corporation shall be managed by or under the direction of a Board
of Directors, who may exercise all of the powers of the corporation except as otherwise provided by Delaware Law, the Certificate of
Incorporation or these Bylaws.

Section 2.02. Number; Election; Tenure and Qualification. Subject to amendment in accordance with Article FIFTH of the
Certificate of Incorporation, the number of directors which shall constitute the whole Board of Directors shall be fixed from time to
time by resolution of the Board of Directors but shall not be less than six or more than twelve. Except as otherwise provided in the
Certificate of Incorporation, each Director elected shall hold office until the next annual meeting of stockholders and their successors
shall be elected in accordance with Article SEVENTH of the Certificate of Incorporation. Directors need not be stockholders of the
corporation

Section 2.03. Vacancies. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the Board of Directors, may be filled by vote of a majority of the directors then
in office, although less than a quorum, or by a sole remaining director. Any director elected by the Board of Directors in accordance
with the preceding sentence shall hold office for a term expiring at the next annual meeting of stockholders and until such director’s
successor shall have been elected and qualified, or until such director’s earlier death, resignation or removal.

Section 2.04. Resignation. Any director may resign upon notice in writing or by electronic transmission to the Board of
Directors, the Chief Executive Officer or the Secretary. Such resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event or events.

Section 2.05. Removal. Any director or the entire Board of Directors may be removed only as permitted by Delaware Law and

Article SEVENTH of the Certificate of Incorporation.

Section 2.06. Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or
dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice
of each regular meeting shall not be required. A regular meeting of the Board of Directors may be held without notice immediately
after and at the same place as the annual meeting of stockholders.

Section 2.07. Special Meetings. Special meetings of the Board of Directors may be held at any time and place, within or without
the State of Delaware, designated by the Chairman of the Board, two or more directors, the Chief Executive Officer, the Secretary or
Assistant Secretary on the written request of two directors.

Section 2.08. Notice of Special Meetings. Notice of any special meeting of directors shall be given to each director by the

Secretary, Assistant Secretary or one of the directors calling the meeting. Notice shall be given to each director in person, by
telephone, by facsimile transmission, by electronic mail or by telegram sent to his or her facsimile number, electronic mail address, or
business or home address, as applicable at least 12 hours in advance of the meeting, or by written notice mailed to his or her business
or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need
not specify the purposes of the meeting.

Section 2.09. Meetings by Telephone Conference Calls. Directors or any members of any committee designated by the directors
may participate in a meeting of the Board of Directors or such committee by means of conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall
constitute presence in person at such meeting.

Section 2.10. Quorum. Except as otherwise provided by the Certificate of Incorporation, a majority of the total number of
directors then authorized shall constitute a quorum at all meetings of the Board of Directors. To the fullest extent permitted by law, in
the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without
further notice other than announcement at the meeting, until a quorum shall be present.

Section 2.11. Action at Meeting. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of

those present shall be sufficient to take any action, unless a different vote is specified by Delaware Law, the Certificate of
Incorporation or these Bylaws.

Section 2.12. Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any

committee of the Board of Directors may be taken without a meeting, if all members of the Board of Directors or committee, as the
case may be, consent to the action in writing, and the written consents are filed with the minutes of proceedings of the Board of
Directors or committee.

Section 2.13. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors,

designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board of
Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of
the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to Delaware Law, shall
have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the
corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Each such committee shall
keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may
otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or
in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these Bylaws for the Board of
Directors.

Section 2.14. Compensation for Directors. Directors may be paid such compensation for their services and such reimbursement

for expenses of attendance at meetings as the Board of Directors may from time to time determine.

ARTICLE 3
OFFICERS

Section 3.01. Enumeration. The officers of the corporation shall consist of a Chairman of the Board, a Chief Executive Officer, a
Chief Financial Officer, a Secretary, and such other officers with such other titles as the Board of Directors shall determine, including,
one or more Executive Vice Presidents and Assistant Secretaries. The Board of Directors may appoint such other officers as it may
deem appropriate.

Section 3.02. Election. The Chief Executive Officer, the Chief Financial Officer and the Secretary shall be elected by the Board

of Directors. Other officers may be appointed by the Board of Directors.

Section 3.03. Qualification. The Chief Executive Officer need not be a director. No officer needs to be a stockholder. Any two

or more offices may be held by the same person, except that no one person shall hold the offices and perform the duties of Chief
Executive Officer and Secretary.

Section 3.04. Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, each officer

shall hold office until his successor is elected and qualified, unless a different term is specified in the vote choosing or appointing
him, or until his earlier death, resignation or removal.

Section 3.05. Resignation and Removal. Any officer may resign by delivering his written resignation to the corporation at its

principal office or to the Chief Executive Officer or the Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other event.

The Board of Directors, or a committee duly authorized to do so, may remove any officer with or without cause. Except as the

Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an
officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his
compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized
written agreement with the corporation.

Section 3.06. Vacancies. The Board of Directors may fill any vacancy occurring in any office for any reason in such manner as
the Board of Directors shall determine. Each such successor shall hold office for the unexpired term of his predecessor and until his
successor is elected and qualified, or until his earlier death, resignation or removal.

Section 3.07. Powers and Duties. The Secretary shall have the duty, among other things, to record the proceedings of the
meetings of stockholders and directors in a book kept for that purpose. The officers of the corporation shall have such powers and
perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or
assigned to them by the Board of Directors.

Section 3.08. Salaries. Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be

fixed or allowed from time to time by the Board of Directors.

ARTICLE 4
CAPITAL STOCK

Section 4.01. Certificates of Stock. Every holder of stock of the corporation represented by certificates shall be entitled to have a

certificate in such form as may be prescribed by Delaware Law and by the Board of Directors, certifying the number and class of
shares owned by him in the corporation. Each such certificate shall be signed by, or in the name of the corporation by, the Chairman
of the Board of Directors or the President, and by the Treasurer or Assistant Treasurer or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a facsimile.

Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation,

the Bylaws, applicable securities laws or any agreement among any number of stockholders or among such holders and the
corporation shall have conspicuously noted on the face or back of the certificate.

Section 4.02. Transfers. Subject to the restrictions, if any, stated or noted on the stock certificates, shares of stock may be
transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate representing such
shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of
authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise
required by Delaware Law, by the

Certificate of Incorporation or by these Bylaws, the corporation shall be entitled to treat the record holder of stock as shown on its
books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock,
regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the
corporation in accordance with the requirements of these Bylaws.

Section 4.03. Lost, Stolen or Destroyed Certificates. The corporation may issue a new certificate of stock in place of any
previously issued certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the Board of Directors
may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any transfer agent or registrar.

Section 4.04. Record Date. In order that the corporation may determine the stockholders entitled to notice of any meeting of

stockholders or any adjournment thereof, the Board of Directors may, except as otherwise required by law, fix a record date, which
record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If the Board of Directors so fixes a
date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of
Directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for
making such determination. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled
to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which
notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new record date for determination of stockholders entitled to
vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned
meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance with the foregoing
provisions of this Section at the adjourned meeting.

In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or
allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or
for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action.
If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the
day on which the Board of Directors adopts the resolution relating thereto.

ARTICLE 5
INDEMNIFICATION

Section 5.01. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is

otherwise involved in any action, suit or proceeding,

whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she is or was a
director or an officer of the corporation or is or was serving at the request of the corporation as a director, officer or trustee of another
corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan
(hereinafter an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer or
trustee or in any other capacity while serving as a director, officer or trustee, shall be indemnified and held harmless by the
corporation to the fullest extent permitted by Delaware law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than such
law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee
in connection therewith. Notwithstanding any other provision of this Article 5, (1) except as provided in Section 5.03 with respect to
proceedings to enforce rights to indemnification and advancement, the corporation shall indemnify, and advance expenses pursuant to
Section 5.02 to, any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors of the corporation; and (2) the corporation’s obligations under
this Article shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person.

Section 5.02. Right to Advancement of Expenses. In addition to the right to indemnification conferred in 5.01, an indemnitee

shall also have the right to be paid by the corporation the expenses (including attorney’s fees) incurred in defending any such
proceeding in advance of its final disposition (hereinafter an “advancement of expenses”); provided, however, that, if the Delaware
Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an “undertaking”), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a “final adjudication”) that such indemnitee is not entitled to be indemnified for such expenses
under this Section 5.02 or otherwise.

Section 5.03. Right of Indemnitee to Bring Suit. If a claim under Section 5.01 or 5.02 is not paid in full by the corporation within

60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim. To the fullest extent permitted by law, if successful in whole or in part in any such suit, or in
a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall
be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit brought by the corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the corporation shall be entitled to recover such

expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the
Delaware Law. Neither the failure of the corporation (including its directors who are not parties to such action, a committee of such
directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct
set forth in the Delaware Law, nor an actual determination by the corporation (including its directors who are not parties to such
action, a committee of such directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable
standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or brought by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article 5 or otherwise shall be on the corporation.

Section 5.04. Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this
Article 5 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the corporation’s
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or directors or otherwise.

Section 5.05. Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer,
employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss
under the Delaware Law.

Section 5.06. Indemnification of Employees and Agents of the Corporation. The corporation may, to the extent authorized from
time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent
of the corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of
expenses of directors and officers of the corporation.

Section 5.07. Nature of Rights. The rights conferred upon indemnitees in this Article 5 shall be contract rights and such rights

shall continue as to an indemnitee who has ceased to be a director, officer or trustee and shall inure to the benefit of the indemnitee’s
heirs, executors and administrators. Any amendment, alteration or repeal of this Article 5 that adversely affects any right of an
indemnitee or its successors shall be prospective only and shall not limit, eliminate, or impair any such right with respect to any
proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment
or repeal.

ARTICLE 6
GENERAL PROVISIONS

Section 6.01. Fiscal Year. Except as from time to time otherwise designated by the Board of Directors, the fiscal year of the

corporation shall end on December 31.

Section 6.02. Corporate Seal. The corporate seal shall be in such form as shall be approved by the Board of Directors.

Section 6.03. Execution of Instruments. The Chief Executive Officer, the Chief Financial Officer, any Executive Vice President

or the Secretary, shall have power to execute and deliver on behalf and in the name of the corporation any instrument requiring the
signature of an officer of the corporation, except as otherwise provided in these Bylaws, or where the execution and delivery of such
an instrument shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation.

Section 6.04. Voting of Securities. Except as the directors may otherwise designate, the Chief Executive Officer, the Chief
Financial Officer, any Executive Vice President, the Secretary may waive notice of, and act as, or appoint any person or persons to act
as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at, any meeting of stockholders or
shareholders of any other corporation or organization (except this corporation), the securities of which may be held by this
corporation.

ARTICLE 7
AMENDMENTS

Section 7.01. By the Board of Directors. Subject to the provisions of the Certificate of Incorporation, these Bylaws may be
altered, amended or repealed or new Bylaws may be adopted by the affirmative vote of a majority of the directors present at any
regular or special meeting of the Board of Directors at which a quorum is present; provided, however, that any Bylaw amendment
adopted by the Board of Directors increasing or reducing the authorized number of Directors shall require the affirmative vote of two-
thirds of the total number of directors which the corporation would have if there were no vacancies.

Section 7.02. By the Stockholders. Subject to the provisions of the Certificate of Incorporation, new Bylaws may be adopted or

the Bylaws may be amended or repealed by the affirmative vote of the holders of at least 66-2/3rds percent of the combined voting
power of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class.

EMPLOYMENT AGREEMENT

Exhibit 10.15

This Employment Agreement (this “Agreement”) is made and entered into by and between E*TRADE Financial Corporation

(the “Company”) and Paul Idzik (“Executive”) as of January 17, 2013.

W I T N E S S E T H:

WHEREAS, Executive is willing to serve as the Chief Executive Officer of the Company, and the Employer desires to retain

Executive in such capacity, on the terms and conditions herein set forth; and

NOW, THEREFORE, in consideration of the promises and the mutual covenants herein contained, the parties hereto hereby

agree as follows:

1. Position and Duties. Starting on January 22, 2013 (the “Effective Date”), the Company hereby agrees to employ Executive as

the Chief Executive Officer of the Company, and Executive agrees to be employed by the Company, upon the terms and conditions
set forth herein. In such capacity, Executive shall report directly to the Board of Directors (the “Board”) of the Company and shall
have and perform the authority and duties normally accorded to such position in a manner consistent with applicable regulatory
requirements and sound business practices.

On or promptly following the Effective Date, Executive shall be appointed to the Board, and the Company agrees that Executive

will continue to be re-nominated to the Board during his employment as Chief Executive Officer of the Company. Executive agrees
that, upon any termination of his employment with the Company, he shall be deemed to resign from the Board unless otherwise
requested by the Board.

Executive agrees to devote all necessary time, energy and skill to his duties at the Company. The Company acknowledges that
Executive may have continued involvement in charitable and civic activities which both parties expect will not create a business or
competitive conflict with the activities of the Company and that, with the prior consent of the Board, Executive may serve on other
corporate boards of directors.

The Company shall provide Executive with the same indemnification and D&O insurance protection provided from time to time

to its officers and directors generally. Notwithstanding anything to the contrary in this Agreement, the rights of Executive to
indemnification and D&O insurance coverage with respect to all matters, events or transactions occurring or effected during
Executive’s period of employment or service as a director with the Company shall survive the termination of Executive’s
employment.

2. Term of Agreement. Executive’s employment under the terms of this Agreement (as may be extended below, the “Term”)

shall be from the Effective Date until the earlier of (i) the third anniversary of the Effective Date or (ii) the date that Executive’s
employment with the Company ends for any reason; provided that unless Executive’s employment has previously terminated, the
“Term” shall automatically

renew for continuing one-year periods unless either party provides at least 90 days’ prior written notice of termination of the
Agreement to be effective at the end of the then-current Term. Executive’s employment with the Company shall be “at-will”,
meaning that either Executive or the Company may terminate Executive’s employment at any time for any or no reason.

3. Compensation. During the Term, Executive shall be compensated by the Company for his services as follows:

(a) Base Salary. Executive shall be paid an annualized base salary of $1,000,000 per year (the “Base Salary”), subject to

applicable withholding, in accordance with the Company’s normal payroll procedures.

(b) Performance Bonus. Executive shall have the opportunity to earn an annual performance-based cash bonus, depending

on Executive and the Company meeting performance targets for the applicable year as established by the Board or its
Compensation Committee. Executive’s annual cash bonus target amount shall be $3,000,000 (the “Annual Target Bonus”),
with a potential range between 0% and 150% of the Annual Target Bonus, and the Company’s practice as of the Effective Date
is to provide a threshold bonus payment of 50% of the Annual Target Bonus if the Board or its Compensation Committee
determines that the Company meets a specified threshold level of performance; provided that Executive’s actual cash bonus for
the year ending December 31, 2013 shall be not less than a prorated portion (representing the period of time from the Effective
Date through the end of such year) of his Annual Target Bonus. The annual bonus will be paid following the end of the
applicable fiscal year at the same time and in the same manner as payments to other senior executives of the Company and,
except as otherwise provided in Section 5 below, is subject to Executive’s continued employment with the Company on the
applicable payment date.

(c) Benefits. Executive shall have the right, on the same basis as other senior executives of the Company, to participate in

and to receive benefits under the Company’s employee benefit plans (including vacation or paid time-off policies), as such plans
may be modified from time to time. The Company will provide reasonable relocation benefits to Executive during the Term, as
more fully set forth on Schedule I hereto.

(d) Business Expenses. The Company shall reimburse Executive for all reasonable out-of-pocket expenses incurred by

Executive in connection with his employment hereunder upon submission of appropriate documentation or receipts in
accordance with the policies and procedures of the Company as in effect from time to time.

4. Equity Compensation.

(a) Initial Equity Awards. On or promptly following the Effective Date, the Executive shall receive restricted stock units

representing the number of

shares of the Company’s common stock determined by dividing $9,000,000 by the average of the high and low of the
Company’s stock price on the grant date (the “Initial Equity Awards”). The Initial Equity Awards shall vest in equal annual
installments on each of the first four anniversaries of the Effective Date so long as Executive remains employed with the
Company on the applicable vesting date. The provisions set forth in Section 5 below shall be deemed to be incorporated into any
award agreement with respect to the Initial Equity Awards and shall supersede any provision therein or in the Company’s equity
incentive plan to the contrary.

(b) Other Awards. Executive may be eligible to receive other equity compensation awards from time to time if the Board or

its Compensation Committee, in its sole discretion, determines that such an award(s) is appropriate. Executive acknowledges
and agrees that, other than the Initial Equity Awards, the Company does not currently intend to grant new equity awards to
Executive during the initial Term of this Agreement.

5. Effect of Termination of Employment or Other Events During the Term.

(a) General. Upon any termination of Executive’s employment during the Term, he will be entitled to payment or

provision when due of (1) any unpaid base salary and expense reimbursements and (2) other unpaid vested amounts or benefits
under Company benefit plans, all of which shall be paid as soon as practicable but no later than 2 and / months following the
end of the year in which termination occurs (except to the extent otherwise provided in the applicable plan or by applicable law),
beyond which the Company and he shall have no further obligations to each other, except as specifically set forth in this
Agreement or the agreements set forth in Section 12(d) below or in a subsequent written agreement between Executive and the
Company.

1 2

(b) Involuntary Termination. In the event of an Involuntary Termination before the end of the Term, then subject to

Executive signing and not revoking the Release, Executive shall receive the following severance benefits:

(i) a lump sum cash severance payment equal to one times the sum of (x) Executive’s annual Base Salary at the time

of termination and (y) Executive’s Annual Target Bonus, which payment shall be paid within 15 days following the
Release Effective Date;

(ii) a pro rata share of the Annual Target Bonus for the year in which termination of employment occurs; provided

that such payment shall be made only if the Company’s performance meets or exceeds the target performance level for the
year of termination, as determined by the Board or its Compensation Committee following the end of the fiscal year, which
payment shall be paid no later than 2 and 1/2 months following the end of the year in which such termination of
employment occurs;

(iii)(A) if the Involuntary Termination occurs outside of a Change in Control Period, then on the Release Effective

Date the following portion of the Initial Equity Awards shall become vested: (x) an amount, if any, such that an aggregate
of one-third (1/3) of the Initial Equity Awards have become vested (whether through regular vesting during Executive’s
employment and/or such accelerated vesting as a result of the Involuntary Termination); and (y) if such Involuntary
Termination occurs after the first anniversary of the Effective Date, an additional amount calculated as (I) two-thirds
(2/3) of the total number of shares subject to the Initial Equity Awards multiplied by (II) a fraction, the denominator of
which is 36 and the numerator of which is the number of months from the most recent annual anniversary of the Effective
Date to the date of termination; or (B) if the Involuntary Termination occurs during a Change in Control Period, 100% of
all unvested Initial Equity Awards shall become vested on the later of the Release Effective Date or the date of the Change
in Control; and

(iv) to the extent Executive is eligible for and elects COBRA continuation through the Company, reimbursement for

the cost of medical coverage at a level equivalent to that provided by the Company immediately prior to termination of
employment, through the earlier of: (A) 12 months following Executive’s termination of employment, or (B) the time
Executive begins alternative employment; provided that (x) it shall be the obligation of Executive to inform the Company
that new employment has been obtained and (y) such reimbursement shall be made by the Company subsidizing or
reimbursing COBRA premiums or, if determined by the Company to be advisable or necessary, by a lump sum payment
based on the monthly premiums immediately prior to the expiration of COBRA coverage.
(c) Termination Due to Non-Renewal by the Company. In the event that the Company delivers to Executive written notice
of non-renewal of this Agreement pursuant to Section 2 hereof, Executive’s employment shall terminate at the end of the Term
and, unless the Company has Cause to terminate Executive’s employment, Executive shall be entitled to receive, subject to
Executive signing and not revoking the Release, (A) a lump sum cash severance payment equal to the sum of Executive’s annual
Base Salary and Executive’s Annual Cash Target, which payment shall be paid within 15 days following the Release Effective
Date, and (B) accelerated vesting on the Release Effective Date of the remaining unvested Initial Equity Awards.

(d) Death or Disability.

(i) In the event of Executive’s death, all unvested Initial Equity Awards shall become fully vested as of the date of

Executive’s death.

(ii) In the event Executive’s employment terminates as a result of his death or Permanent Disability, Executive (or
Executive’s estate, as applicable) shall be entitled to a pro rata share of Executive’s cash performance bonus (which during
2013 shall be a pro rata share of the Annual Cash Target) to the date of death or termination for Permanent Disability,
which shall be paid no later than 2 and 1/2 months following the end of the year in which such death or Permanent
Disability occurs.
(e) Other Termination. In the event of a termination of Executive’s employment not specified under Section 5(b), Section 5
(c) or Section 5(d) above, Executive shall not be entitled to any compensation or benefits from the Company except as provided
in Section 5(a) above.

6. Certain Tax Considerations.
(a) Section 409A.

(i) The payments and benefits under Section 5 are intended to qualify for the short-term deferral exception to
Section 409A of the Code (“Section 409A”) described in the regulations promulgated under Section 409A (the “Section
409A Regulations”) to the maximum extent possible, and to the extent they do not so qualify, they are intended to qualify
for the involuntary separation pay plan exception to Section 409A described in the Section 409A Regulations to the
maximum extent possible. To the extent Section 409A is applicable to this Agreement, this Agreement is intended to
comply with Section 409A, and shall be interpreted and construed and shall be performed by the parties consistent with
such intent, and the Company shall have no right, without Executive’s consent, to accelerate any payment or the provision
of any benefits under this Agreement if such payment or provision of such benefits would, as a result, be subject to tax
under Section 409A. To the extent any payment hereunder is determined to be deferred compensation subject to
Section 409A, then to the extent required to avoid penalty under Section 409A, any such payment hereunder that could be
paid in either of two taxable years shall be made in the second taxable year.

(ii) Without limiting the generality of the foregoing, if Executive is a “specified employee” within the meaning of

Section 409A, as determined under the Company’s established methodology for determining specified employees, on the
date of termination of employment, then with respect to any payment or benefit considered to be deferred compensation
subject to Section 409A and to the extent required in order to comply with Section 409A, amounts that would otherwise be
payable under this Agreement during the six-month period immediately following such termination date shall instead be
paid (together with interest at the then current six-month LIBOR rate) on the first business day after the first to occur of
(i) the date that is six months following Executive’s termination of employment and (ii) the date of Executive’s death.

(iii) Except as expressly provided otherwise herein, no reimbursement payable to Executive pursuant to any

provisions of this Agreement or pursuant to any plan or arrangement of the Company covered by this Agreement shall be
paid later than the last day of the calendar year following the calendar year in which the related expense was incurred, and
no such reimbursement during any calendar year shall affect the amounts eligible for reimbursement in any other calendar
year, except, in each case, to the extent that the right to reimbursement does not provide for a “deferral of compensation”
within the meaning of Section 409A.

(iv) For purposes of this Agreement, the terms “terminate,” “terminated” and “termination” mean a termination of

Executive’s employment that constitutes a “separation from service” within the meaning of the default rules of
Section 409A; provided, however, that, in the event of Executive’s Permanent Disability, to the extent required under
Section 409A, “separation from service” means the date that is six months after the first day of disability.
(b) 280G Limitation. If the payments and benefits provided to Executive under this Agreement, either alone or together
with other payments and benefits provided to him from the Company (including, without limitation, any accelerated vesting
thereof) (the “Total Payments”), would constitute a “parachute payment” (as defined in Section 280G of the Code) and be
subject to the excise tax (the “Excise Tax”) imposed under Section 4999 of the Code, the Total Payments shall be reduced if and
to the extent that a reduction in the Total Payments would result in Executive retaining a larger amount than if Executive
received all of the Total Payments, in each case measured on an after-tax basis (taking into account federal, state and local
income taxes and, if applicable, the Excise Tax). The determination of any reduction in the Total Payments shall be made at the
Company’s cost by the Company’s independent public accountants or another firm designated by the Company and reasonably
approved by Executive, and may be determined using reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. The Company shall pay Executive’s costs incurred for tax, accounting and other
professional advice in the event of a challenge of any such reasonable, good faith interpretations by the Internal Revenue
Service.

7. Certain Definitions. For the purposes of this Agreement, the following capitalized terms shall have the meanings set forth

below:

(a) “Cause” shall mean any of the following:

(i) Executive’s theft, dishonesty, willful misconduct in the performance of his duties, breach of fiduciary duty for

personal profit, or falsification of any material employment or Company records;

(ii) Executive’s conviction (including any plea of guilty or nolo contendere) of any criminal act involving fraud,
dishonesty, misappropriation or moral turpitude, or which materially impairs Executive’s ability to perform his duties with
the Company;

(iii) Executive’s intentional and repeated failure to perform lawful stated duties after written notice from the

Company and a reasonable opportunity to cure such failure;

(iv) Executive’s improper disclosure of the Company’s confidential or proprietary information;
(v) any material breach by Executive of the Company’s Code of Professional Conduct, which breach shall be deemed

“material” if it results from an intentional act by Executive and has a material detrimental effect on the Company’s
reputation or business; or

(vi) any material breach by Executive of this Agreement or of any agreement regarding proprietary information and

inventions, which breach, if curable, is not cured within 30 days following written notice of such breach from the
Company.

In the event that the Company terminates Executive’s employment for Cause, the Company shall provide, prior to or
concurrently with the termination of employment, written notice to Executive of that fact, stating with specificity the grounds for
the termination for Cause and the clause in the foregoing definition on which the Company is relying. Failure to provide written
notice that the Company contends that the termination is for Cause shall constitute a waiver of any contention that the
termination was for Cause, and the termination shall be irrebuttably presumed to be an involuntary termination without Cause.
However, if, within 30 days following the termination, the Company first discovers facts that would have established “Cause”
for termination, and those facts were not known by the Company at the time of the termination, then the Company shall provide
Executive with written notice, including the facts establishing that the purported “Cause” was not known at the time of the
termination, and the Company will pay no severance.

(b) “Change in Control” shall mean the occurrence of any of the following events:

(i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as

amended) or more than one person acting as a group (as determined under Treas. Reg. Section

1.409A-3(i)(5)(v)(B)) becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing at least 51% of the total combined voting power represented by the Company’s
then outstanding voting securities other than the acquisition of the Company’s common stock by a Company-sponsored
employee benefit plan;

(ii) the Company consummates a merger or consolidation which results in the holders of the voting securities of the
Company outstanding immediately prior thereto failing to retain immediately after such merger or consolidation direct or
indirect beneficial ownership of at least 51% of the total combined voting power of the securities entitled to vote generally
in the election of directors of the Company or the surviving entity outstanding immediately after such merger or
consolidation;

(iii) a change in the composition of the Board occurring within a period of 12 consecutive months, as a result of

which fewer than a majority of the directors are Incumbent Directors;

(iv) the Company consummates the sale, lease or disposition by the Company of all or substantially all of the

Company’s assets; or

(v) a liquidation or dissolution of the Company.

(c) “Code” means the Internal Revenue Code of 1986, as amended.
(d) “Change in Control Period” shall mean the period (i) ending on the second anniversary of a Change in Control and

(ii) commencing on the earlier of the date of the first public announcement of the definitive agreement (or the date of the public
announcement of a tender offer that is not approved by the Incumbent Directors) that results in such Change in Control or 60
days prior to the consummation of such Change in Control.

(e) “Good Reason” shall mean any of the following conditions without Executive’s consent:

(i) a material decrease in Executive’s Base Salary;
(ii) a material, adverse change in Executive’s title, authority, responsibilities or duties, as measured against

Executive’s title, authority, responsibilities or duties immediately prior to such change; provided that following a Change
in Control, for purposes of this subsection (ii), in addition to any other material, adverse change in title, authority,
responsibilities or duties, Executive not reporting to the Board of Directors or Executive not being Chief Executive Officer
of the surviving combined company shall constitute an event of “Good Reason”;

(iii) any material breach by the Company of any provision of this Agreement, which breach is not cured within 30

days following written notice of such breach from Executive; or

(iv) any failure of the Company to obtain the assumption (by operation of law or by contract) of this Agreement by

any successor or assign of the Company;

provided that Executive shall have provided written notice to the Company of the existence of the condition, stating with specificity
the grounds constituting Good Reason, within 90 days of the initial existence of the condition.

(f) “Incumbent Directors” shall mean members of the Board who either (i) are members of the Board as of the date

hereof, or (ii) are elected, or nominated for election, to the Board with the affirmative vote of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination
is in connection with an actual or threatened proxy contest relating to the election of members of the Board).

(g) “Involuntary Termination” shall mean the occurrence of one of the following:

(i) termination by the Company of Executive’s employment with the Company for any reason other than Cause at any

time;

(ii) Executive’s resignation from employment for Good Reason within six months following the occurrence of the

event constituting Good Reason.
(h) “Permanent Disability” shall mean Executive’s permanent and total disability within the meaning of Section 22(e)(3)

of the Code.

(i) “Release” shall mean a general release of all known and unknown claims against the Company and its affiliates and

their stockholders, directors, officers, employees, agents, successors and assigns substantially in a form (including non-
disparagement provisions) reasonably acceptable to the Company, which has been signed by Executive and not revoked within
the applicable revocation period; provided that such Release shall not release the right to indemnification or any of the
compensation and benefits Executive is due under Section 5 hereof upon the applicable termination of employment.

(j) “Release Effective Date” shall mean the 8 day following the date on which Executive signs the Release if Executive
has not revoked the Release and subject to Executive signing the Release within 21 days following termination of employment
(or such longer period as required by applicable law or agreed by the parties, but in any event no more than 45 days following
termination of employment).

8. Agreements and Representations by Executive.

(a) No Conflicts. Executive represents that he is not subject to any restrictive covenants and obligations with any prior
employers or businesses that would prevent him from fully performing his duties for the Company. Executive further represents
that his performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any
agreement to keep in confidence proprietary information, knowledge or data acquired by him in confidence or in trust prior to
his employment by the Company, and he will not disclose to the Company or induce the Company to use any confidential or
proprietary information or material belonging to any previous employers or others.

(b) Proprietary Information and Covenants. Executive agrees to execute and comply with the Company’s standard

Agreement Regarding Employment and Proprietary Information and Inventions.

(c) Insider Trading Policy. Executive agrees to abide by the terms and conditions of the Company’s Insider Trading Policy,

as it may be amended from time to time, and such other Company policies as may be applicable to senior officers and directors
from time to time.

9. Dispute Resolution. In the event of any dispute or claim relating to or arising out of this Agreement (including, but not limited

to, any claims of breach of contract, wrongful termination or age, sex, race or other discrimination), and except for disputes that are
subject to mandatory arbitration under FINRA rules if applicable, Executive and the Company agree that all such disputes shall be
fully and finally resolved by binding arbitration conducted by the American Arbitration Association in New York, New York in
accordance with its National Employment Dispute Resolution rules. Executive acknowledges that by accepting this arbitration
provision he is waiving any right to a jury trial in the event of such dispute. In connection with any such arbitration, the Company
shall bear all costs not otherwise borne by a plaintiff in a court proceeding.

10. Attorneys’ Fees. The prevailing party shall be entitled to recover from the losing party its attorneys’ fees and costs incurred
in any action brought to enforce any right arising out of this Agreement. The Company shall pay Executive’s reasonable legal fees in
connection with the review and negotiation of this Agreement.

11. No Mitigation or Offset. Executive shall not be required to mitigate the amount of any payment provided for herein by
seeking other employment or otherwise and any such payment will not be reduced in the event such other employment is obtained.

12. General.

(a) Successors and Assigns. The provisions of this Agreement shall inure to the benefit of and be binding upon the
Company, Executive and each and all of their respective heirs, legal representatives, successors and assigns. The duties,
responsibilities and obligations of Executive under this Agreement shall be personal and not assignable or delegable by
Executive in any manner whatsoever to any person, corporation, partnership, firm, company, joint venture or other entity.
Executive may not assign, transfer, convey, mortgage, pledge or in any other manner encumber the compensation or other
benefits to be received by him or any rights which he may have pursuant to the terms and provisions of this Agreement.

(b) Amendments; Waiver. No provision of this Agreement shall be modified, waived or discharged unless the modification,
waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company. No waiver by
either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition or provision at another time.

personal delivery or by overnight delivery with receipt requested. Mailed notices shall be addressed to the parties at the
addresses stated below, but each party may change its or his address by written notice to the other in accordance with this
Paragraph.

Mailed notices to Executive shall be addressed to the last known address provided by Executive to the Company, with a

copy to:

Wayne Outten
Outten & Golden
3 Park Avenue
New York, NY 10016

Mailed notices to the Company shall be addressed as follows:

E*TRADE Financial Corporation
1271 Avenue of the Americas, 14 Floor
th
New York, New York 10020
Attention: General Counsel
With a copy to:
E*TRADE Financial Corporation
1271 Avenue of the Americas, 14 Floor
th
New York, New York 10020
Attention: Chair of the Compensation Committee

(d) Entire Agreement. This Agreement constitutes the entire employment agreement between Executive and the Company

regarding the terms and conditions of his employment and any amounts due on termination of such employment, with the
exception of (i) an Agreement Regarding Employment and Proprietary Information and Inventions, (ii) any indemnification
agreement between Executive and the Company and (iii) the Company’s employee benefit plans referenced in Section 3(c). This
Agreement supersedes all prior negotiations, representations or agreements between Executive and the Company, whether
written or oral, concerning Executive’s employment by or service to the Company.

(e) Withholding Taxes. All payments made under this Agreement shall be subject to reduction to reflect taxes required to

be withheld by law.

(f) Counterparts. This Agreement may be executed by the Company and Executive in counterparts, each of which shall be

deemed an original and which together shall constitute one instrument.

(g) Headings. Each and all of the headings contained in this Agreement are for reference purposes only and shall not in any

manner whatsoever affect the construction or interpretation of this Agreement or be deemed a part of this Agreement for any
purpose whatsoever.

(h) Savings Provision. To the extent that any provision of this Agreement or any paragraph, term, provision, sentence,
phrase, clause or word of this Agreement shall be found to be illegal or unenforceable for any reason, such paragraph, term,
provision, sentence, phrase, clause or word shall be modified or deleted in such a manner as to make this Agreement, as so
modified, legal and enforceable under applicable laws. The remainder of this Agreement shall continue in full force and effect.
(i) Construction. The language of this Agreement and of each and every paragraph, term and provision of this Agreement
shall, in all cases, for any and all purposes, and in any and all circumstances whatsoever be construed as a whole, according to
its fair meaning, not strictly for or against Executive or the Company, and with no regard whatsoever to the identity or status of
any person or persons who drafted all or any portion of this Agreement.

(j) Further Assurances. From time to time, at the Company’s request and without further consideration, Executive shall
execute and deliver such additional documents and take all such further action as reasonably requested by the Company to be
necessary or desirable to make effective, in the most expeditious manner possible, the terms of this Agreement and to provide
adequate assurance of Executive’s due performance hereunder.

(k) Governing Law. Executive and the Company agree that this Agreement shall be interpreted in accordance with and

governed by the laws of the State of New York.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year written below.

Dated: January 17, 2013

E*TRADE FINANCIAL CORPORATION

Dated: January 16, 2013

/S/ FRANK J. PETRILLI

By:
Name: Frank J. Petrilli
Title: Chairman and Interim

Chief Executive Officer

/S/ PAUL T. IDZIK
EXECUTIVE

•

Up to 12 round-trip transatlantic air tickets during the first 7 months of employment, for use by Executive and/or his wife

Schedule 1 – Relocation Benefits

Company-paid annual tax preparation assistance for U.S. and U.K. returns

Up to 6 months of appropriate temporary housing in New York

Relocation of personal items/goods

•

From the U.K. to the U.S. at commencement of employment
From the U.S. to the U.K. at end of employment

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1

Exhibit 14.1

Code of
Professional Conduct

E*TRADE FINANCIAL CORPORATION
Corporate Policies and Procedures

Table of Contents

INTRODUCTION

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, temporary agency employee, contractor and director of E*TRADE (“you” and collectively) must abide
by the Statement of Ethics below and each employee must abide by this Code of Professional Conduct (the “Code”).

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, including each employee, temporary agency employee, contractor and director of ETFC adhere to all applicable laws,
rules and regulations (including, but not limited to those promulgated by Securities and Exchange Commission (“SEC”),
the Financial Industry Regulatory Authority (“FINRA”), the Office of the Comptroller of the Currency (“OCC”), the
Federal Reserve Bank of Richmond (the “Fed”), the Federal Deposit Insurance Corporation (“FDIC”), the Consumer
Finance Protection Bureau (“CFPB”), Office of Foreign Assets Control (“OFAC”) or related to Anti-terrorism or Anti-
Money Laundering).

Treatment and Conduct of Employees, Temporary Agency Employees, Contractors and Directors

•

We treat all employees, temporary agency employees, contractors and directors respectfully and fairly.
We do not tolerate any form of harassment.

Throughout the Code, the term “E*TRADE” or the “Company” refers to E*TRADE Financial Corporation (“ETFC”) and its
subsidiaries, 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 anyone asking our employees, temporary agency employees, contractors and directors to break the law,

or violate E*TRADE’s policies, procedures or values.

We provide employees 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.
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 Sections of this Code entitled “Acceptance of Gifts, Meals or Entertainment” and “Providing Gifts, Meals
or Entertainment.”
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 conduct themselves in accordance with the highest standards of ethics, honesty and
integrity, E*TRADE has adopted this Code of, which sets forth standards for conduct for all of our employees.

It is the responsibility of each employee of E*TRADE to comply with the 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 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, and Human Resources. 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 of
E*TRADE. Most corporate policies are posted on My Channel*E. New employees, temporary agency employees, contractors should
ask their supervisor for all policies that apply to their business unit. We recognize that members of the ETFC 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 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, which includes our
CEO and each of the Executive Vice Presidents (collectively “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, or
Human Resources Department directly. 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, 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 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 state or country in which you work or reside.
Disciplinary actions may be taken:
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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.

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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 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 are regulated by governmental entities, such as the SEC, the OCC, Fed, FDIC, the
CFPB and various state regulators and self-regulatory organizations (“SROs”), such as the 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’s Brokerage Compliance Department 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 all felony and certain misdemeanor charges and convictions against
certain employees, 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 its 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 OCC and Fed rules.

Insider Trading
Federal law and E*TRADE policy prohibits any E*TRADE 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, employees must fully comply with E*TRADE’s records management 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 in accordance with the records management policy. 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 under such policies and procedures. 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/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 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 Foreign Corrupt Practices Act (“FCPA”) contains two principal parts. First, the FCPA makes it a criminal offense to pay, offer,
or give anything of value to a foreign official, a foreign political party (or official thereof) or candidate for foreign office, for the
purpose of influencing the decisions of those officials, parties or candidates to secure any 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. This
is true regardless of the fact that giving anything of value may be widely accepted or even seem necessary in the country in question.

The scope of the laws concerning corruption of public officials is very broad. The laws prohibit not only payments to public officials,
but also any offer, promise (even if never fulfilled) or merely an authorization to pay a public official. Such payment, offer, promise
or authorization may be direct or indirect. Thus, a company and its agents also will be liable under the laws if they attempt to “funnel”
a payment indirectly to a public official by using an unrelated third party as a conduit. In addition, “payment” under the laws is not
limited to money. Payment includes “anything of value” including non-monetary gifts, free trips and other forms of non-cash favors.
Even payments to foreign charities could be improper under the FCPA.

Second, the FCPA sets forth record keeping and accounting requirements that require E*TRADE to maintain books, records and
accounts in detail such that they accurately and fairly reflect all transactions and dispositions of assets. Thus the FCPA prohibits the
mischaracterization or omission of any transaction on a company’s books as well as any failure to maintain proper accounting
controls that result in such mischaracterization or omission. Accordingly, covering up a transaction which violates the FCPA by
mischaracterizing it on the Company’s books and records (such as an expense account) is itself a separate violation of the FCPA.

The FCPA and laws like it apply to all E*TRADE and all of its subsidiaries as well as to all E*TRADE employees, directors and
agents, regardless of citizenship or residency.

All E*TRADE employees, agents, representatives and consultants must comply with both parts of the FCPA. Violating any laws
governing corruption of foreign officials can result in severe civil and individual criminal penalties for both E*TRADE and the
responsible employee(s) or agent(s). In addition, any violation of the FCPA will result in discipline by the Company, up to and
including termination of employment. If you have any questions regarding the FCPA and similar laws generally, or any questions or
concerns about a specific transaction or payment, please contact the Legal Department immediately.

Economic Sanctions
E*TRADE policy requires compliance with economic sanctions imposed by 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 USA 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 by sending an email to AML Concern.

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, send an email to AML Concern 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 the Legal Department 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 the Legal Department
concerning its patentability. Similarly, before introducing or using any software application, business method or invention that is
similar to that of another company, inventor or person, particularly but not exclusively in the financial services sector, you must
consult with the Legal Department. Please note that E*TRADE owns all rights in any intellectual property developed by employees
during their 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. Disclosure 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/departments/bankcompliance/policies

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, please contact the Legal
Department or E*TRADE’s Privacy Officer, by sending an email to CPO@etrade.com.

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 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.

DEALING WITH THIRD PARTIES
Authority to Act on Behalf of E*TRADE
Employees 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 may enter into commitments on behalf of E*TRADE,
which include signing contracts on behalf of any E*TRADE entity in accordance with applicable policies and procedures. All
contracts with third party vendors must be reviewed by Procurement and approved by the Legal Department 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 or Proprietary 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.

•

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 may not accept gifts or excessive meals and 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 not 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 in value); (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 judgment or the performance of his or her 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 have
any questions regarding the appropriateness of a gift or entertainment, employees 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 from providing gifts, meals or entertainment in
excess of specified monetary levels (or of any value, in some cases) to customers, vendors, suppliers, and other third parties. More
specifically, FINRA rules effectively prohibit E*TRADE employees from providing gifts in excess of $100 per person annually to
third parties with which E*TRADE has a prospective or existing business relationship. 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. Regardless of
dollar value, however, in no event should 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.

In all cases, employees must provide complete and accurate expense reports for all gifts and entertainment expenses paid for by
E*TRADE.

Please note that special restrictions often apply to gifts and entertainment provided to government or SRO 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 any of these policies or rules, contact Associate Surveillance within the Compliance Department
or send an email to: associatesurveillance@etrade.com.

Approval of Nonconforming Gifts, Meals or Entertainment
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 or provision 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/recipient, 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, in the case of accepting a gift, or the reason why the gift should be permitted, in the case of
providing a gift.

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 Giving 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 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 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 certain other written communications, scripts and public speaking points, including articles and commentary,
mentioning E*TRADE must be approved by Corporate Communications, the Legal Department and Advertising Review in the
Compliance Department before being published or otherwise released by E*TRADE.

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. 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 any electronic forum, except as specified below. 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.

You may identify yourself as an E*TRADE employee in professional social media forums (e.g., LinkedIn, Jobster, JobFox,
MyWorkster, etc.) as well as Facebook (so long as Facebook is accessed in accordance with this Code and related social medial
policies and procedures) and the information is limited to the type of information that appears on your E*TRADE business card or
resume. E*TRADE employees should not “recommend” or “endorse” current or former employees in professional online or

other forums and should never post or share proprietary E*TRADE work content. To review the Company’s policy regarding
references and verification of employment visit:
https://mychannele.corp.etradegrp.com/web/life/policy/employment.

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
You must 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. You should only communicate such information and documents within E*TRADE on a
strict need-to-know basis and only at the direction of the Legal Department. You may 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 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
Handling Proprietary 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 that relates to E*TRADE’s business which is developed by you during your
employment, 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 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

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.

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 and futures 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 an 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 Inside 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 issuers 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 you become aware of a violation, you are to notify the Compliance Department as soon as
practicable, and in no event later than 24 hours following your discovery 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 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.

•

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.

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

E*TRADE Financial Corporation

Subsidiaries of Registrant

Exhibit 21.1

Company
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
G1 Execution Services, 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 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 Information Services, LLC
ETCM Holdings, Inc.
E*TRADE Insurance Services, Inc.
E*TRADE Master Trust
E*TRADE Mauritius Limited
E*TRADE Platform Services, LLC
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
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

Jurisdiction Name
Delaware
Delaware
Sweden
Sweden
Federal Charter
Delaware
Delaware
Illinois
Delaware
Delaware
Delaware
Delaware
Delaware
The Netherlands
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
California

Mauritius
Deleware
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 Securities (Hong Kong) Limited
ETRADE Securities Limited
E*TRADE Insight Management, Inc.
TIR (Holdings) Limited
ET Canada Holdings Inc.

Delaware
Delaware
Delaware
Delaware
Delaware
Nevada
Delaware
Delaware
Hong Kong
Hong Kong
Hong Kong
Massachusetts
Cayman Islands
Canada

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 26, 2013, relating to the consolidated financial statements of E*TRADE Financial Corporation and
subsidiaries 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, 2012.

Exhibit 23.1

Filed on Form S-3:
Registration Statement Nos.:

Filed on Form S-4:
Registration Statement Nos.:

Filed on Form S-8:
Registration Statement Nos.:

/s/ Deloitte & Touche LLP

McLean, Virginia
February 26, 2013

333-104903, 333-41628, 333-124673, 333-129077, 333-130258, 333-136356, 333-
150997, 333-156570, 333-158636, 333-181390

333-91467, 333-62230, 333-117080, 333-129833

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

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, Paul T. Idzik, 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 26, 2013

E*TRADE Financial Corporation
(Registrant)

/S/ PAUL T. IDZIK
Paul T. Idzik
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 26, 2013

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.

Paul T. Idzik, 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 26, 2013

/S/ PAUL T. IDZIK
Paul T. Idzik
Chief Executive Officer
(Principal Executive Officer)

/S/ MATTHEW J. AUDETTE
Matthew J. Audette
Chief Financial Officer
(Principal Financial and Accounting Officer)