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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-K
_____________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
The NASDAQ Stock Market LLC
NASDAQ Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
__________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
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
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.
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
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
At June 30, 2015, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $6.1 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 affiliates' 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 19, 2016, there were 282,708,675 shares of common stock outstanding.
Documents Incorporated by Reference: Certain portions of the definitive Proxy Statement related to the Company’s 2016 Annual Meeting
of Stockholders, to be filed hereafter (incorporated into Part III hereof).
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E*TRADE FINANCIAL CORPORATION
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 2015
TABLE OF CONTENTS
PART I
Forward-Looking Statements
Item 1.
Business
Overview
Strategy
Technology
Products and Services
Sales and Customer Service
Competition
Regulation
Available Information
Properties
Legal Proceedings
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Selected Consolidated Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Earnings Overview
Segment Results Review
Balance Sheet Overview
Liquidity and Capital Resources
Risk Management
Concentrations of Credit Risk
Summary of Critical Accounting Policies and Estimates
Statistical Disclosure by Bank Holding Companies
Glossary of Terms
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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
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
Policies
Note 2—Operating Interest Income and Operating Interest Expense
Note 3—Fair Value Disclosures
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Note 4—Offsetting Assets and Liabilities
Note 5—Available-for-Sale and Held-to-Maturity Securities
Note 6—Loans Receivable, Net
Note 7—Accounting for Derivative Instruments and Hedging Activities
Note 8—Property and Equipment, Net
Note 9—Goodwill and Other Intangibles, Net
Note 10—Receivables From and Payables to Brokers, Dealers and Clearing Organizations
Note 11—Deposits
Note 12—Other Borrowings
Note 13—Corporate Debt
Note 14—Income Taxes
Note 15—Shareholders’ Equity
Note 16—Earnings 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)
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Exhibits and Financial Statement Schedules
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Item 9.
Item 9A.
Item 9B.
PART III
PART IV
Item 15.
Signatures
Unless otherwise indicated, references to "the Company," "we," "us," "our" and "E*TRADE" mean E*TRADE
Financial Corporation and its subsidiaries, and references to the parent company mean E*TRADE Financial
Corporation but not its subsidiaries.
E*TRADE, E*TRADE Financial, E*TRADE Bank, Equity Edge and the Converging Arrows logo are
registered trademarks of E*TRADE Financial Corporation in the United States and in other countries.
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PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, within the meaning of the Private Securities Litigation
Reform Act of 1995, that involve risks and uncertainties. These statements discuss, among other things, our future
plans, objectives, outlook, strategies, expectations and intentions relating to our business and future financial and
operating results and the assumptions that underlie these matters and include any statement that is not historical in
nature. These statements may be identified by the use of words such as "assume," "expect," "believe," "may," "will,"
"should," "anticipate," "intend," "plan," "estimate," "continue" and similar expressions. We caution that actual results
could differ materially from those discussed in these forward-looking statements. Important factors that could
contribute to our actual results differing materially from any forward-looking statements include, but are not limited to,
those discussed under Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations; Part I. Item 1A. Risk Factors of this Form 10-K; and elsewhere in this report and in other reports we file
with the Securities and Exchange Commission ("SEC"). By their nature forward-looking statements are not guarantees
of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or
quantify. Actual future results may vary materially from expectations expressed or implied in this report or any of our
prior communications. The forward-looking statements contained in this report reflect our expectations only as of the
date of this report. You should not place undue reliance on forward-looking statements, as we do not undertake to
update or revise forward-looking statements to reflect the impact of circumstances or events that arise after the date the
forward-looking statements were made, except as required by law.
ITEM 1.
BUSINESS
OVERVIEW
We are a financial services company that provides brokerage and related products and services primarily to
individual retail investors under the brand "E*TRADE Financial." Our competitive strategy is to attract and retain
customers by emphasizing a hybrid model for investing, trading and saving for retirement that leads with best-in-class
digital channels, backed by professional support and guidance. We also provide investor-focused banking products,
primarily sweep deposits, to retail investors.
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 3,400
employees at December 31, 2015. 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 Securities LLC ("E*TRADE Securities") is a registered broker-dealer and is the primary
provider of brokerage products and services to our customers;
E*TRADE Clearing LLC ("E*TRADE Clearing") is the clearing firm for our brokerage subsidiaries
and its main purpose is to clear and settle securities transactions for customers of E*TRADE
Securities;
E*TRADE Bank is a federally chartered savings bank utilized by E*TRADE's broker-dealers to
maximize the value of customer deposits. It provides our customers with Federal Deposit Insurance
Corporation ("FDIC") insurance on a certain amount of customer deposits and provides other
banking products to our customers; and
E*TRADE Financial Corporate Services is a provider of software and services for managing equity
compensation plans to our corporate clients.
A complete list of our subsidiaries at December 31, 2015 can be found in Exhibit 21.1.
Our hybrid service delivery model is delivered through the following digital platforms:
•
•
E*TRADE.com is our award-winning site that provides customers with tools, guidance, actionable
ideas, research and education to take control of their finances;
E*TRADE Mobile offers powerful trading applications for all popular smartphones and tablets,
coupled with groundbreaking experiences like the Apple Watch® app - delivering the functionality
investors and traders need while on the go; and
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E*TRADE Pro is our advanced trading platform for active and elite traders, with sophisticated tools
and customizable layouts.
These digital platforms are complemented by our offline channels, which include our network of customer
service representatives and financial consultants and our 24/7 customer service available via phone, email and online
at our two national branches and in person through our 30 regional branches. Information on our website is not a part
of this report.
STRATEGY
Our business strategy is centered on two core objectives: accelerating the growth of our core brokerage
business to drive organic growth and improve market share, and generating robust earnings growth and healthy returns
on capital to deliver long-term value for our stockholders.
Accelerate Growth of Core Brokerage Business
•
Enhance digital and offline customer experience
We are focused on delivering innovative solutions for trading, margin lending and cash management,
while expanding our customer share of wallet in retirement, investing and savings. Through these
offerings, we aim to continue acquiring new customers while deepening engagement with both new
and existing customers.
•
Capitalize on value of corporate services business
Our corporate services business is a strategically important driver of brokerage account and asset
growth for us. We leverage our industry-leading position to improve client acquisition, and
bolstering awareness among U.S. plan participants of our full suite of offerings.
Generate Robust Earnings Growth and Healthy Returns on Capital
•
Maximize value of customer deposits while improving balance sheet efficiency
Our brokerage business generates a significant amount of stable, low-cost deposits, which we
monetize through E*TRADE Bank by investing primarily in low-risk, agency mortgage-backed
securities. We also continue to manage down the size and risks associated with our legacy loan
portfolio, while mitigating credit losses where possible.
•
Create capital efficiency
Our capital plan was laid out in 2012 with a key goal of distributing capital from E*TRADE Bank to
the parent company, to reduce corporate debt, which we completed in March 2015. As we continue
to deliver on our capital plan initiatives, we are focused on deploying excess capital generated
through earnings and lower capital requirements at E*TRADE Bank.
TECHNOLOGY
Delivering a compelling digital experience to our customers is a core pillar of our business strategy. We
believe our focus on being a digital leader in the financial services industry is a competitive advantage. Following
significant investments to strengthen our foundations in 2013 and 2014, we made a number of meaningful
enhancements to our digital storefront and core platforms in 2015 that provide our customers an engaging, more
intuitive experience. Significant updates in 2015 include:
•
•
•
new features for our website including a new welcome page on our website for prospective
customers, an updated account overview page, a new retirement center and a new tax center;
new features for our leading mobile applications including conditional orders, multi-leg options
orders, mutual fund trading, and several new technologies available via Apple® products including
our Apple Watch® app; and
upgrades to E*TRADE Pro, including a new options analyzer tool, new margin analyzer tool, and a
new user orientation module with customized predefined layouts.
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PRODUCTS AND SERVICES
We assess the performance of our business based on our two core segments: trading and investing and
balance sheet management. Trading and investing focuses on: 1) Trading, Margin and Cash Management; 2)
Retirement, Investing and Saving; and 3) Corporate Services. The factors used to judge our performance include
profitability, customer activity and financial metrics, along with the competitiveness of our overall value proposition to
the customer and our customers' engagement with E*TRADE. We assess the performance of our balance sheet
management segment using metrics such as regulatory capital ratios, 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 comprehensive suite of financial products and services to
individual retail investors. The most significant of these products and services are described below:
Trading, Margin and Cash Management
Trading, Margin and Cash Management delivers automated order placement and execution, empowering
traders throughout the entire life cycle of a trade. We offer our customers a full range of investment vehicles including
U.S. equities, American depositary receipts ("ADRs"), bonds, futures, options, exchange-traded funds ("ETFs"),
including over 115 commission-free ETFs from leading independent providers, and over 7,500 non-proprietary mutual
funds. Our tools cater to novice to professional-grade investors, delivering fundamental and technical research
resources.
Our trading tools and vehicles are supported by guidance when customers need it, including fixed income and
derivative specialists available on-call to guide customers, independent research and analytics, live and on-demand
education resources, strategies and trading ideas and comprehensive screeners for all major asset classes.
Cash management includes FDIC insured deposit accounts, including checking, savings and money market
accounts. These are fully integrated into customer brokerage accounts, delivering real-time transfers between
E*TRADE accounts, free debit cards and unlimited ATM fee refunds, free online and mobile bill pay, mobile check
deposits, and Apple Pay.
Margin accounts are also available to qualified customers, enabling them to borrow against their securities.
We provide these customers with robust margin tools including a margin calculator, requirement lookup and margin
analyzer tools to help customers strategize, plan and execute margin trades more efficiently and effectively.
Retirement, Investing and Saving
Retirement, Investing and Saving is dedicated to expanding our customer share of wallet by helping investors
take control of and understand the steps to achieve their desired financial goals. We offer the following account types
and services:
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Individual Retirement Accounts ("IRAs") with no annual fees and no minimums, along with
specialists to guide customers through the rollover process;
Managed Investment Portfolio advisory services from an affiliated registered investment advisor,
with an investment of $25,000 or more, which provides one-on-one professional portfolio
management; and
Unified Managed Account advisory services from an affiliated registered investment advisor, with an
investment of $250,000 or more, which provides customers the opportunity to work with a dedicated
investment professional to obtain a comprehensive, integrated approach to asset allocation,
investments, and portfolio rebalancing.
We also offer a full breadth of digital tools to help investors take control:
•
OneStop Rollover, a simplified, online rollover program that enables investors to invest their 401(k)
savings from a previous employer into a portfolio managed by the customer or an investment
professional;
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Online Portfolio Advisor, helping customers identify asset allocations and providing a range of
solutions including a one-time investment portfolio or a managed investment account;
Retirement Center, offering interactive tools, account selection assistance and to-do lists;
Investing Insights, delivering idea generation, topical ideas and actionable strategies;
Bond Resource Center, offering tools to help customers research, evaluate and choose bonds;
TipRanks, helping customers make sense of sellside ratings and social chatter through success
metrics and aggregated sentiment; and
life-stage planning resources, helping investors plan for all phases of the retirement process.
Education and guidance also play a large role as we deliver a wide variety of educational formats, including
traditional in-person events and digital content on our platforms. We also offer guidance from our financial consultants
and Chartered Retirement Planning CounselorsSM at our 30 regional branches across the country, or through our two
national branches via phone and email to receive complementary portfolio reviews and personalized investment
recommendations.
Corporate Services
The corporate services business is an important driver of brokerage account and asset growth, with more than
1.4 million individual stock plan accounts across approximately 1,000 corporate clients that represent approximately
20% of S&P 500 companies. This business serves as an important introductory channel to E*TRADE, with our goal of
converting the stock plan participants of our corporate clients into retail brokerage customers by providing best-in-
class user experience and technology along with exceptional support and service. We offer the following software and
services for managing equity compensation plans for corporate customers through the Equity Edge Online™ platform:
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management of employee stock option plans, employee stock purchase plans and restricted stock
plans with fully-automated administration, as well as accounting, reporting and scenario modeling
tools;
integrated stock plan solutions including multi-currency settlement and delivery, disbursement in 33
countries, streamlined tax calculations and country code compatibility;
stock plan and investing education, restricted stock sales support, custom 10b5-1 plan design and
implementation, SEC filing assistance; and
dedicated stock plan service representatives with live support in six languages in addition to phone-
based translation in 140 languages.
Equity Edge Online™ recordkeeping and reporting was rated #1 in Loyalty and Overall Satisfaction for the
fourth year in a row by Group Five, an independent consulting and research firm, in its 2015 Stock Plan
Administration Study Industry Report.
Balance Sheet Management
The balance sheet management segment serves as a means to maximize the value of our customer deposits,
focusing on asset allocation and managing credit, liquidity and interest rate risks. The balance sheet management
segment manages our legacy loan portfolio which has been in run-off since 2008, as well as agency mortgage-backed
securities, and other investments. Funding sources consist primarily of deposits and customer payables 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.
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SALES AND CUSTOMER SERVICE
We believe providing superior sales and customer service is fundamental to our business. We 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. All customer-facing
employees are Series 7 registered. Our customer service representatives utilize our proprietary web-based platform that
enables our team to reduce the number of touch-points required to answer customer inquiries. We also have specialized
customer service programs that are tailored to the needs of each core customer group.
We provide sales and customer support through the following channels of our registered broker-dealer and
investment advisory subsidiaries:
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Branches - we have 30 branches located across the U.S. where retail investors can get face-to-face support
and guidance. Financial consultants are 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. In addition, we
offer our Investor Education Center, providing customers with access to a variety of live and on-demand
educational content and courses.
Phone - we have a toll free number that connects customers to the appropriate department where a financial
consultant or Series 7 licensed customer service representative can assist with the customer's inquiry.
COMPETITION
The online financial services market continues to evolve and remains highly competitive. Our trading and
investing segment competes with full service brokerage firms, Registered Investment Advisers ("RIAs"), discount
brokerage firms, online brokerage firms, personal finance start-ups, Internet banks and traditional "brick & mortar"
retail banks and thrifts. Some of these competitors provide online trading and banking services, investment advisor
services, robo-advice capabilities, 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 all users of
market liquidity, including the types of competitors listed above, in order to obtain the least expensive source of
funding.
The financial services industry has become more concentrated, driven by consolidation over time. The
proliferation of emerging financial technology start-ups further evidences the continued shift to digital advice. We
believe we are well-positioned to capitalize on these trends and to continue to attract and retain retail customers, given
our digital roots and our innovative, easy-to-use platforms and financial products.
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 agencies and various non-U.S.
governmental agencies and certain self-regulatory organizations, such as central banks and securities exchanges, that
have been charged with the protection of the financial markets and the protection of the interests of those participating
in those markets. We have been, along with other large financial institutions, subject to a broad range of recently
adopted rules and regulations and a climate of heightened regulatory scrutiny, particularly with respect to compliance
with laws and regulations, including our controls and business processes. As our business and our balance sheet grow,
we may become subject to additional regulations and heightened scrutiny by our regulators, as applicable to larger
financial institutions. For example, certain regulations become applicable to financial institutions with average total
consolidated assets of at least $50 billion for the four most recent consecutive quarters.
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Our primary regulators in the U.S. include, among others, the SEC, the Financial Industry Regulatory
Authority ("FINRA"), The NASDAQ Stock Market ("NASDAQ"), the Commodity Futures Trading Commission
("CFTC"), the National Futures Association ("NFA"), 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").
The Federal Reserve has primary jurisdiction for the supervision and regulation of savings and loan holding
companies, including the Company. We are required to file periodic reports with the Federal Reserve and are subject to
examination and supervision by it. 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 on such matters as liquidity risk management, securitizations, operational risk management, internal
controls and audit systems, business continuity and compensation and other employee benefits.
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") was signed into law
in July 2010. It requires various federal agencies to adopt a broad range of new rules and regulations. Although the
majority of the required rules and regulations have now been finalized, many still remain in proposed form or have yet
to be proposed and the substance and full impact of the Act may not fully be known for months or years.
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 and combating terrorism.
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.
Our regulators, including regulatory examiners, are increasingly focused on ensuring that our customer
privacy, data protection and information security-related policies and practices are adequate to inform consumers of
our data collection, use, sharing and/or security practices, to provide them with choices, if required, about how we use
and share their information, and to safeguard their personal information. We maintain systems designed to comply
with these privacy, data protection and information security requirements, including procedures designed to securely
process, transmit and store confidential information and protect against unauthorized access to such information. 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. These 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 U.S. 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. In addition, E*TRADE Clearing and E*TRADE Securities are registered with the CFTC as a futures
commission merchant and introducing broker, respectively, and are both members of the NFA. Such regulation covers
various aspects of these businesses, including for example, 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 Hong Kong Securities &
Futures Commission.
The Dodd-Frank Act includes various provisions that affect the regulation of broker-dealers, futures
commission merchants and introducing brokers. For example, the SEC is authorized to adopt a fiduciary duty standard
applicable to broker-dealers when providing personalized securities investment advice to retail customers. To date, the
SEC has not proposed any rulemaking under this authority.
The U.S. Department of Labor has proposed revisions to regulations under the Employee Retirement Income
Security Act of 1974 that could subject broker-dealers to a fiduciary duty and prohibit specified transactions for a
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wider range of customer interactions. For the business activities affected, these developments may impact how we
conduct business, decrease profitability and increase potential liabilities.
Banking Regulation
Our banking entities are subject to regulation, supervision and examination for safety and soundness by the
Federal Reserve, OCC, FDIC and CFPB for compliance with federal consumer finance laws. Such regulation covers
all aspects of the banking business, including lending practices, safeguarding deposits, customer privacy and
information security, capital structure, transactions with affiliates and conduct and qualifications of personnel.
Each of our banking entities has deposits insured by the FDIC and pays quarterly assessments to the Deposit
Insurance Fund ("DIF"), maintained by the FDIC, for this insurance coverage. On October 22, 2015, the FDIC
released a notice of a proposed rulemaking to add a surcharge to the regular deposit insurance fund assessments of
banks with $10 billion or more in assets, which would include E*TRADE Bank. If this rule were finalized as
proposed, E*TRADE Bank would be subject to an additional surcharge applied to its assessment base, beginning
sometime in 2016 and likely continuing through 2018. The comment period ended on January 5, 2016 and we continue
to monitor the developments related to this proposed rulemaking.
Under the Home Owners’ Loan Act (“HOLA”), the OCC requires E*TRADE Bank to comply with the qualified
thrift lender (“QTL”) test. Under the QTL test, E*TRADE Bank is required to maintain at least 65% of its “portfolio
assets” in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain
mortgage-backed securities, credit card loans, student loans and small business loans) in at least nine months of the most
recent 12-month period. E*TRADE Bank currently meets that test. A savings association that fails to meet the QTL test
is subject to certain operating restrictions and may be required to convert to a national bank charter.
In addition, in certain circumstances each of our banking entities may be subject to restrictions on its ability
to declare dividends or make capital distributions. A federal savings association, such as E*TRADE Bank, must file an
application with the OCC if, among other things, the association would not be at least “adequately capitalized”
following the distribution. Where no application is required, a federal savings association is still required to provide
the OCC with notice of the proposed distribution. Federal savings associations such as E*TRADE Bank that are
subsidiaries of savings and loan holding companies must also file an informational notice of a proposed dividend with
the Federal Reserve. If the association is not otherwise required to file an application or notice with the OCC, it must
provide the OCC with a copy of the notice at the same time that it is filed with the Federal Reserve.
Banking Regulatory Capital Requirements
Given the parent company's designation as a savings and loan holding company, the applicability and timing
of adoption of certain banking regulations has varied for the parent company and E*TRADE Bank. The Dodd-Frank
Act now 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 and resulted in new banking regulatory
capital requirements at the parent company, effective January 1, 2015. Previously, only E*TRADE Bank was subject
to banking regulatory capital requirements.
In July 2013, the U.S. Federal banking agencies finalized a rule to implement Basel III in the U.S., which
provides the framework for the calculation of a banking organization’s regulatory capital and risk-weighted assets. The
rule became effective for us and for E*TRADE Bank on January 1, 2015, subject to a phase-in period for certain
requirements over several years. The Basel III rule establishes Common Equity Tier 1 capital as a new tier of capital,
raises the minimum thresholds for required capital, increases minimum required risk-based capital ratios, narrows the
eligibility criteria for regulatory capital instruments, provides for new regulatory capital deductions and adjustments,
and modifies methods for calculating risk-weighted assets (the denominator of risk-based capital ratios) by, among
other things, strengthening counterparty credit risk capital requirements.
The Basel III final rule also introduces a capital conservation buffer that limits a banking organization’s
ability to make capital distributions and discretionary bonus payments to executive officers if a banking organization
fails to maintain a Common Equity Tier 1 capital conservation buffer of more than 2.5%, on a fully phased-in basis, of
total risk-weighted assets above each of the following minimum risk-based capital ratio requirements: Common Equity
Tier 1 (4.5%), Tier 1 (6.0%), and total risk-based capital (8.0%). This requirement was effective beginning on January
1, 2016, and will be fully phased-in by 2019. Certain new regulatory deductions and adjustments are subject to a
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phase-in period over a four year period, beginning at 40% in 2015 and fully implemented at 100% in 2018. We expect
to remain compliant with the Basel III framework as it is phased-in.
Several elements of the final rule had a meaningful impact to us. The vast majority of our margin receivables
now qualify for 0% risk-weighting and a larger portion of our deferred tax assets can be included in regulatory capital,
both favorably impacting our current capital ratios. A portion of this benefit is offset by the phasing-out of our trust
preferred securities ("TRUPs") from the parent company's capital. In addition, upon adoption, we made the one-time,
permanent election to exclude accumulated other comprehensive income ("AOCI") from the calculation of Common
Equity Tier 1 capital.
Prompt Corrective Action
The FDIC Improvement Act of 1991 requires the appropriate federal banking regulator to take "prompt
corrective action" with respect to a depository institution if that institution does not meet certain capital adequacy
standards. While these regulations apply only to banks, such as E*TRADE Bank, the Federal Reserve is authorized to
take appropriate action against the parent savings and loan holding company, such as E*TRADE Financial
Corporation, based on the undercapitalized status of any bank subsidiary. In certain instances, we would be required to
guarantee the performance of a capital restoration plan if our bank subsidiary were undercapitalized.
Derivatives
Title VII of the Dodd-Frank Act subjects derivatives that we enter into for hedging, risk management and
other purposes to a comprehensive regulatory regime. This regime requires central clearing and execution on
designated markets or execution facilities for certain standardized derivatives and imposes or will impose margin,
documentation, trade reporting and other new requirements. We are currently in compliance with these requirements as
they apply to our activities, and they did not have a material impact on our operations.
Volcker Rule
In December 2013, the Federal Reserve, OCC, FDIC, SEC and CFTC issued final rules to implement section
619 of the Dodd-Frank Act (these rules collectively known as the "Volcker Rule"). The Volcker Rule imposes prohibitions
and restrictions on the ability of banking entities and nonbank financial companies to engage in proprietary trading, and
to have certain interests in, or relationships with, hedge funds or private equity funds. Banking entities were required to
bring all of their activities and investments into conformance with the Volcker Rule by July 21, 2015, subject to certain
extensions. In addition, the Volcker Rule requires banking entities to have comprehensive compliance programs reasonably
designed to ensure and monitor compliance with the Volcker Rule. We are currently in compliance with all Volcker Rule
requirements applicable to our operations.
Stress Testing
On October 9, 2012, federal banking regulators issued final rules implementing provisions of the Dodd-Frank
Act that require banking organizations with total consolidated assets of more than $10 billion but less than $50 billion
to conduct annual company-run stress tests, report the results to their primary federal regulator and the Federal
Reserve and publish a summary of the results. Under the rules, stress tests must be conducted using certain scenarios
(baseline, adverse and severely adverse), which the Federal Reserve will publish by November 15 of each year.
Under these rules, E*TRADE Bank was required to conduct its first stress test using financial statement data
as of September 30, 2013, and to submit the results prior to March 31, 2014. Beginning with its second annual stress
test in 2015, E*TRADE Bank is now required to publish summary results of its annual stress test between June 15 and
June 30 each year. Accordingly, in 2015, E*TRADE Bank submitted and we published on our website the results of
E*TRADE Bank's second annual stress test, as required.
Under the final Federal Reserve regulations, the parent company will be required to: conduct its first annual
stress test using financial statement data as of September 30, 2016, report the results of our first annual stress test to
the Federal Reserve on or before March 31, 2017, and disclose a summary of our stress test results in June 2017.
For additional regulatory information on our brokerage and banking regulations, see Note 17—Regulatory
Requirements of Item 8. Financial Statements and Supplementary Data.
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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. Information on our website is not part of this
report.
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 discussion sets forth the risk factors which could materially and adversely affect our business,
financial condition and results of operations, and should be carefully considered in addition to the other information
set forth in this report. Additional risks and uncertainties not currently known to us or that we currently do not deem to
be material may also adversely affect our business, financial condition and results of operations.
Risks Relating to the Nature and Operation of Our Business
Turmoil in the global financial markets could reduce trading volumes and margin lending and increase our
dependence on our more active customers who receive lower pricing, resulting in lower revenues.
Digital investing services to the retail customer, including trading, margin lending and sweep deposits,
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 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 lending, which would reduce the revenue that we generate from interest charged on margin receivables and
increase our credit risk because the value of the collateral could fall below the amount of indebtedness it secures.
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 as hedging instruments to reduce the potential effects of changes in interest rates on our results of
operations. 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 our net operating
interest income.
Enterprise net interest spread may fluctuate based on the size and mix of the balance sheet, as well as the
impact from the interest rate environment.
We will continue to experience losses in our mortgage loan portfolio.
At December 31, 2015, the principal balance of our one-to four-family loan portfolio was $2.5 billion and the
allowance for loan losses for this portfolio was $40 million. At December 31, 2015, the principal balance of our home
equity loan portfolio was $2.1 billion and the allowance for loan losses for this portfolio was $307 million. Although
the provision for loan losses has declined in recent periods and we recognized a provision benefit for loan losses of
$40 million during the year ended December 31, 2015, performance is subject to variability in any given quarter and
we cannot state with certainty that the declining loan loss trend will continue. Due to the complexity and judgment
required by management about the effect of matters that are inherently uncertain, there can be no assurance that our
allowance for loan losses will be adequate. In the normal course of conducting examinations, our banking regulators,
the OCC and Federal Reserve, continue to review our policies and procedures. This process is dynamic and ongoing
and we cannot be certain that additional changes or actions to our policies and procedures will not result from their
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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.
Certain characteristics of our mortgage loan portfolio indicate an increased risk of loss. For example, at
December 31, 2015:
•
•
•
approximately 14% and 34% 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%;
borrowers with current Fair Isaac Credit Organization ("FICO") scores less than 700 consisted of
approximately 33% and 39% of the one- to four-family and home equity loan portfolios,
respectively; and
approximately 39% and 50% of the one- to four-family and home equity loan portfolios,
respectively, were not yet amortizing.
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. For example, at
December 31, 2015:
•
•
•
approximately 87% of the home equity loan portfolio are second lien loans on residential real estate
properties;
we hold both the first and second lien positions in less than 1% of the home equity loan portfolio;
and
the majority of home equity lines of credit convert to amortizing loans at the end of the draw period,
which typically ranges from five to ten years, while approximately 4% of this portfolio will require
the borrowers to repay the loan in full at the end of the draw period, commonly referred to as
"balloon loans."
Second lien loans carry higher credit risk because the holder of the first lien mortgage has priority in right of
payment. Therefore, downturns in real estate markets may result in the value of the collateral being insufficient to
cover the second lien positions. In addition, in loans for which we do not hold the first lien positions, we are exposed
to risk associated with the actions and inactions of the first lien holder. The average estimated current CLTV on our
home equity loan portfolio was 90% as of December 31, 2015.
We monitor our borrowers by refreshing FICO scores and CLTV information on a quarterly basis. We do not
have access to complete data on the first lien positions of second lien home equity loans. Actual loan defaults and
delinquencies of amortizing home equity lines of credit that exceed our current expectations could negatively impact
our financial performance.
We rely on third party service providers to perform certain key functions and any failure to perform those functions as a
result of operational or technological failure, including cybersecurity attacks on our third party service providers could
result in the interruption of our operations and systems and could result in significant costs and reputational damage to
us.
We rely on third party service providers for certain technology, processing, servicing and support functions.
These third party service providers are also susceptible to operational and technology vulnerabilities, which may
impact our business. In addition, these third party service providers may rely on other parties (also referred to as
“fourth parties” or sub-contractors) to provide services to us which also face similar risks. For example, external
content providers provide us with financial information, market news, quotes, research reports and other fundamental
data that we offer to clients. 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. These services cover payment information on home equity
loans, including which borrowers are paying only the minimum amount due.
As part of our enterprise risk management program build-out, we have invested in our third party oversight
capabilities which included enhanced processes to evaluate third party providers, designed to verify that the third party
service providers can support the stability of our operations and systems. However, these efforts may be insufficient
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and we cannot assure you that we will not experience a failure as a result of a third party service provider. Any
significant failures or security breaches by or of our third party service providers or their sub-contractors, including
any actual or perceived cybersecurity attacks, security breaches, fraud, phishing attacks, acts of vandalism, information
security breaches and computer viruses which could result in unauthorized access, misuse, loss or destruction of data,
an interruption in service or other similar events could interrupt our business, cause us to incur losses, subject us to
fines or litigation and harm our reputation. 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
ability to offer certain products and services and cause us to incur losses. We cannot assure you that any of these third
party service providers or their sub-contractors will be able to continue to provide their products and services in an
efficient, cost effective manner, if at all, or that they will be able to adequately expand their services to meet our needs
and those of our customers. We may incur significant additional costs to implement enhanced protective measures and
technology, to investigate and remediate vulnerabilities or other exposures or to make required notifications.
We expect that our regulators will hold us responsible for any deficiencies in our oversight and control of our
third party relationships and for the performance of such third parties. If there were deficiencies in the oversight and
control of our third party relationships, and if our regulators held us responsible for those deficiencies, our business,
reputation, and results of operations could be adversely affected.
We conduct all of our operations through subsidiaries and rely on dividends from our subsidiaries for a substantial amount
of our cash flows.
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 certain 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, and otherwise conduct our business.
In particular, a savings association that is part of a savings and loan holding company structure, such as
E*TRADE Bank, must file a notice of a declaration of a dividend with the Federal Reserve at least 30 days before the
proposed dividend declaration by the bank’s board of directors. OCC regulations set forth the circumstances under
which a federal savings association is required to submit an application or notice before it may make a capital
distribution. See Item 1. Business—Regulation for additional information.
As of December 31, 2015, much of our capital was invested in our banking subsidiary E*TRADE Bank.
Subject to non-objection by the Federal Reserve, we plan to request ongoing quarterly dividends in the amount of
E*TRADE Bank's net income from the previous quarter. The Federal Reserve may object to a proposed capital
distribution if, among other things, E*TRADE Bank is, or as a result of such dividend or distribution would be,
undercapitalized or it has safety and soundness concerns. We cannot be certain, however, that we will receive
regulatory approval for such contemplated dividends at the requested levels or at all.
Under the OCC stress test regulations, E*TRADE Bank is required to conduct stress-testing using the
prescribed stress-testing methodologies. The final OCC regulations require E*TRADE Bank to conduct its stress test
using financial statement data as of September 30 of each year, and to submit the results prior to March 31 of the
following year. Accordingly, E*TRADE Bank began conducting its first annual stress test using financial statement
data as of September 30, 2013, and submitted the results prior to March 31, 2014. Beginning with its second annual
stress test, E*TRADE Bank is now required to publish summary results of its annual stress test between June 15 and
June 30 each year. In 2015, E*TRADE Bank submitted and published the results of its second annual stress test, as
required. The OCC analyzes and provides feedback on the quality of E*TRADE Bank's stress test process and results.
While there is no formal mechanism for the OCC to "pass" or "fail" E*TRADE Bank's stress test processes and results,
it will likely consider these processes and results in evaluating proposed actions that may affect our bank's capital,
including but not limited to redemption or repurchase of regulatory capital instruments, dividends and mergers and
acquisitions. If the OCC were to object to any such proposed action, our business prospects, results of operations and
financial condition could be adversely affected.
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We operate in a highly competitive industry where 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 us,
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 combinations of
products and services that could attract current and prospective E*TRADE customers and potentially result in
intensified price competition within the industry. We may not be able to match the marketing efforts or prices of our
competitors due to our financial position and cost structure. Some of our competitors may also benefit from
established relationships among themselves or with third parties enhancing their products and services.
In addition, we compete in a technology-intensive industry characterized by rapid innovation. We may be
unable to effectively use new technologies, adopt our services to emerging industry standards or develop, introduce
and market enhanced or new products and services. If we are not able to update or adapt our products and services to
take advantage of the latest technologies and standards, or are otherwise unable to tailor the delivery of our services to
the latest personal and mobile computing devices preferred by our retail customers, our business and financial
performance could suffer.
Our ability to compete successfully in the financial services industry depends on a number of factors,
including, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
maintaining and expanding our market position;
attracting and retaining customers;
providing easy to use and innovative financial products and services;
our reputation and the market perception of our brand and overall value;
maintaining competitive pricing;
competing in a concentrated competitive landscape;
the quality of our technology (including cybersecurity defenses), products and services;
deploying a secure and scalable technology and back office platform;
innovating effectively in launching new or enhanced products;
the differences in regulatory oversight regimes to which we and our competitors are subject;
attracting new employees and retaining our existing employees; and
general economic and industry trends.
Our competitive position within the industry could be adversely affected if we are unable to adequately
address these factors, which could have a material adverse effect on our business and financial condition.
If we do not successfully participate in consolidation opportunities, we could be at a competitive disadvantage.
There has been significant consolidation in the financial services industry and this consolidation may continue
in the future. If we fail to take advantage of viable consolidation opportunities, our competitors may be able to
capitalize on those opportunities and take advantage of greater scale and cost efficiencies to our detriment.
We may seek to acquire businesses in the future, although the terms of our corporate debt, including the
senior secured revolving credit facility, may impact our ability to do so. 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 on our business. 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
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we expect with respect to an acquisition. Further, an acquisition may cause us to assume unknown material liabilities
or become subject to litigation or regulatory proceedings. In addition, if a portion or all of the purchase price of an
acquisition is paid through an issuance of our common stock, that issuance would be dilutive to our current
stockholders. Acquisitions are typically subject to closing conditions, including regulatory approvals, and there can be
no assurances that any acquisition will close on the expected terms or within the expected time frame, or at all. We
may fail to realize the anticipated benefits of an acquisition which could have a material adverse effect on our business
and results of operations.
We rely heavily on technology, which can be subject to interruption and instability due to operational and technological
failures, both internal and external.
We rely on technology, particularly the Internet and mobile services, to conduct much of our business activity
and allow our customers to conduct financial transactions. Our systems and operations, including our primary and
disaster recovery data center operations, are vulnerable to disruptions from human error, natural disasters, power
outages, computer and telecommunications failures, software bugs, computer viruses or other malicious software,
distributed denial of service attacks, spam attacks, security breaches and other similar events. In addition,
extraordinary trading volumes or site usage could cause our computer systems to operate at an unacceptably slow
speed or even fail. Disruptions to, instability of or other failure to effectively maintain our information technology
systems or external technology that allows our customers to use our products and services could harm our business and
our reputation. Should our technology operations be disrupted, we may have to make significant investments to
upgrade, repair or replace our technology infrastructure and may not be able to make such investments on a timely
basis. While we have made significant investments designed to enhance the reliability and scalability of our
operations, we cannot assure you that we will be able to maintain, expand and upgrade our systems and infrastructure
to meet future requirements and mitigate future risks on a timely basis or that we will be able to retain skilled
information technology employees. Disruptions in service and slower system response times could result in substantial
losses, decreased client service and satisfaction, customer attrition and harm to our reputation. In addition, technology
systems, including our own proprietary systems and 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. Further, any actual or perceived
breach or cybersecurity attack directed at other financial institutions or financial services companies, whether or not
we are impacted, could lead to a general loss of customer confidence in the use of technology to conduct financial
transactions, which could negatively impact us, including the market perception of the effectiveness of our security
measures and technology infrastructure. The occurrence of any of these events may have a material adverse effect on
our business or results of operations.
Further, 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, home networks
and mobile devices or against the third-party networks and systems of internet and mobile service providers 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 our customers’ own personal systems. Such reimbursements may not be
covered by applicable insurance and could have a material impact on our financial performance and results of
operations.
Unauthorized disclosure of confidential customer information, whether through a breach of our computer systems or
those of our customers or third parties, may subject us to significant liability and reputational harm.
As part of our business, we are required to collect, use and store customer, employee and third party
personally identifiable information ("PII"). This may include, among other information, names, addresses, phone
numbers, email addresses, contact preferences, tax identification numbers and account information. We maintain
systems including procedures designed to securely process, transmit and store confidential information (including PII)
and protect against unauthorized access to such information. We also require our third party service providers to have
adequate security if they have access to PII. However, these risks have grown in recent years due to increased
sophistication and activities of organized crime, hackers, terrorists and other external parties. For example, we, and
other financial institutions, experienced a cyber-incident in 2013 which resulted in certain customer contact
information being compromised and potentially accessed by unauthorized third parties. As of the date of this Annual
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Report, we are unaware of any financial fraud or other misuse of customer data resulting from this incident. We are
cooperating with government agencies in connection with their investigation.
We have continued to invest in our technology infrastructure, including sophisticated security measures, but,
despite these investments, we, our customers and our third party service providers may be vulnerable to additional
security breaches, phishing attacks, acts of vandalism, information security breaches, computer viruses or other
cybersecurity attacks which could result in unauthorized access, misuse, loss or destruction of data, an interruption in
service or other similar events. In addition, because the methods and techniques employed by organized crime,
hackers, terrorists and other external parties are increasingly sophisticated and often are not fully recognized or
understood until after they have been launched, we may be unable to anticipate, detect or implement effective
preventative measures against cybersecurity attacks, which could result in substantial exposure of either employee or
customer PII. Any security breach, real or perceived, involving the misappropriation, loss or other unauthorized
disclosure of PII, whether by us, our customers or our third party service providers, could severely damage our
reputation, expose us to the risk of litigation and liability, disrupt our operations and have a materially adverse effect
on our business. In addition, although we maintain insurance coverage that we believe is reasonable, prudent and
adequate for the purpose of our business, it may be insufficient to protect us against all losses and costs stemming from
security breaches, cyber-attacks and other types of unlawful activity, or any resulting disruptions from such events.
Future legislation and regulatory action regarding cybersecurity or PII could result in increased costs and compliance
efforts.
We may suffer losses due to credit risk associated with margin lending, securities loaned transactions or financial
transactions with counterparties.
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 default on their obligations. We also engage
in financial transactions with counterparties, including repurchase agreements, that expose us to credit losses in the
event counterparties cannot meet their obligations. See Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Risk Management for additional information.
Advisory services subject us to additional risks.
We provide advisory services to investors to aid them in their decision making. Investment recommendations
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 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. Risks associated with advisory services also include those arising from
possible conflicts of interest, inadequate due diligence, inadequate disclosure, human error and fraud. 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.
Our corporate debt may limit how we conduct our business.
We have $1 billion of corporate debt and have the capacity to incur $250 million in additional indebtedness
under our senior secured revolving credit facility, subject to certain restrictive covenants. Our expected annual debt
service interest payment is approximately $50 million. Our ratio of corporate debt to equity (expressed as a
percentage) was 17% at December 31, 2015. The degree to which we are leveraged could have important
consequences, including:
•
•
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;
our ability to obtain additional financing for working capital, capital expenditures, acquisitions and
other corporate needs may be limited; and
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•
our leverage may affect our ability to adjust rapidly to changing market conditions and make us
more vulnerable in the event of a 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. 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 or notification 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.
We have a significant deferred tax asset and cannot assure it will be fully realized.
We had net deferred tax assets of $1.0 billion at December 31, 2015. We did not establish a valuation
allowance against our federal net deferred tax assets at December 31, 2015 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. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Summary of Critical Accounting Policies and Estimates for additional information.
As a result of a registered offering of our common stock, an exchange of certain of our debt securities 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 a registered offering of our common stock, an exchange of certain of our debt securities 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 carryforwards 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 carryforward 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. It is possible the tax ownership change will extend the period of time it will take to
fully utilize our pre-ownership change net operating losses ("NOLs"); however, we believe it will not limit the total
amount of pre-ownership change federal NOLs we can utilize. This is a complex analysis and requires us to make
certain judgments in determining the annual limitation. As a result, it is possible that we could ultimately lose a portion
of our deferred tax assets, which could have a material adverse effect on our results of operations and financial
condition.
15
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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. Our broker-dealer subsidiaries must
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.
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 and, in the case of the savings banks,
also the FDIC and CFPB. Such regulation covers all banking business, including lending practices, safeguarding
deposits, capital structure, recordkeeping, transactions with affiliates and conduct and qualifications of personnel.
In providing services to clients, we manage, use and store sensitive customer data including PII. As a result,
we are subject to numerous laws and regulations designed to protect this information, such as U.S. federal and state
laws and foreign regulations governing the protection of PII. These laws have increased in complexity, change
frequently and can conflict with one another.
While we have implemented policies and procedures designed to provide for compliance with all applicable
laws and regulations, our regulators have broad discretion with respect to the enforcement of applicable laws and
regulations and there can be no assurance that violations will not occur. Failure to comply with applicable laws and
regulations and our policies could result in sanctions by regulatory agencies, litigation, civil penalties and harm to our
reputation, which could have a material adverse effect on our business, financial condition and results of operations.
Further, to the extent we undertake actions requiring regulatory approval or non-objection, our regulators may make
their approval or non-objection subject to conditions or restrictions that could have a material adverse effect on our
business, results of operations and financial condition. We also anticipate that regulators will continue to intensify their
supervision through the exam process and increase their enforcement of regulations across the industry. The regulators'
heightened expectations and intense supervision have and will continue to increase our costs and may limit our ability
to pursue certain business opportunities.
As our business and our balance sheet grow, we may become subject to additional regulations and heightened
scrutiny by our regulators, as applicable to larger financial institutions. These additional regulations may affect how
we conduct our business through capital, client protection, market conduct or other requirements. In addition, our
results of operations could be affected by regulations which impact the business and financial communities generally,
including changes to the laws governing taxation, electronic commerce, customer privacy and security of customer
data. If we fail to establish and enforce procedures to comply with applicable regulations, our failure could have a
material adverse effect on our business.
Ongoing regulatory reform efforts may have a material impact on our operations. In addition, if we are unable to meet
any new or ongoing requirements, we could face negative regulatory consequences, which could have a material adverse
effect on our business.
In July 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 other portions were or will be effective following extended transition periods or
through numerous rulemakings by multiple government agencies, some of which have not yet been completed. While
there continues to be some uncertainty about the full impact of these changes, we do know that we are subject to a
more complex regulatory framework and we will continue to incur costs to implement the new requirements as well as
monitor for continued compliance.
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 maintained the federal thrift
charter, it eliminated certain preemption, branching and other benefits of the charter and imposed new penalties for
failure to comply with the QTL test. The Dodd-Frank Act also requires all companies, including savings and loan
16
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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. 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 since the passage of Dodd-Frank has been that savings and loan
holding companies such as our Company are now subject to the same capital and activity requirements as those
applicable to bank holding companies. The phase-in of these capital requirements began January 1, 2015 and we will
be required to comply with the fully phased-in capital standards beginning in 2019. We 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 additional, more stringent capital and other prudential standards, which could be applicable to us, prior to
the end of the five year phase-in period. For example, both the OCC and the Federal Reserve have issued generally
applicable final regulations that required E*TRADE Bank and will ultimately also require the parent company to
conduct capital adequacy tests on their operations. Pursuant to those regulations, E*TRADE Bank disclosed a
summary of these stress test results to the OCC in 2014 and 2015 and the Company will ultimately also be required to
disclose a summary of its stress test results to the Federal Reserve on or before March 31, 2017.
In addition, the U.S. Department of Labor is pursuing regulations seeking to broaden the definition of who is
an investment advice fiduciary and how such advice can be provided to account holders in retirement accounts such as
401(k) plans and IRAs. The final rule is expected to be issued later in 2016, and may have an adverse impact on our
business.
New legislation, rule changes or changes in the interpretation or enforcement of existing laws, rules and
regulations could increase our compliance costs and adversely affect our business and results of operations. For further
information on how ongoing regulatory reform could affect us, see Item 1. Business—Regulation.
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.
During 2012, we completed a review of order handling practices and pricing for order flow between
E*TRADE Securities and G1 Execution Services, LLC. We implemented the changes to our practices and procedures
that were recommended during the review. Banking regulators and federal securities regulators were regularly updated
during the course of the review and may initiate investigations into the Company’s 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. Any of these actions could materially and adversely affect us. On July 11, 2013, FINRA notified
E*TRADE Securities and G1 Execution Services, LLC that it is conducting an examination of both firms’ routing
practices. We are cooperating fully with FINRA in this examination. Under the agreement governing the sale of G1
Execution Services, LLC to Susquehanna International Group, LLP, we remain responsible for any resulting actions
taken against G1 Execution Services, LLC as a result of such investigation.
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We are subject to litigation and regulatory investigations and may not always be successful in defending against such
claims and proceedings.
The financial services industry faces substantial litigation and regulatory risks. We are subject to arbitration
claims and lawsuits in the ordinary course of our business, as well as class actions and other significant litigation. We
also are the subject of inquiries, investigations and proceedings by regulatory and other governmental agencies. Actions
brought against us may result in settlements, awards, injunctions, fines, penalties and other results adverse to us. Predicting
the outcome of such matters is inherently difficult, particularly where claims are brought on behalf of various classes
of claimants or by a large number of claimants, when claimants seek substantial or unspecified damages or when
investigations or legal proceedings are at an early stage. A substantial judgment, settlement, fine or penalty could be
material to our operating results or cash flows for a particular period, depending on our results for that period, or could
cause us significant reputational harm, which could harm our business prospects. In market downturns, the volume of
legal claims and amount of damages sought in litigation and regulatory proceedings against financial services companies
have historically increased. We are also subject to litigation claims from third parties alleging infringement of their
intellectual property rights. Such litigation can require the expenditure of significant resources, regardless of whether
the claims have merit. If we were found to have infringed a third-party patent or other intellectual property right, we
could incur substantial liability and in some circumstances could be enjoined from using the relevant technology or
providing related products and services, which could have a material adverse effect on our business and results of
operations.
If we do not maintain the capital levels required by regulators, we may be fined or subject to other disciplinary or
corrective actions.
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 became subject to specific capital requirements administered by the Federal Reserve on January
1, 2015. 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. In
July 2013, the U.S. Federal banking agencies finalized a rule to implement Basel III in the U.S., which provides the
framework for the calculation of a banking organization’s regulatory capital and risk-weighted assets. The Basel III
framework establishes Common Equity Tier 1 capital as a new tier of capital, raises the minimum thresholds for
required capital, increases minimum required risk-based capital ratios, narrows the eligibility criteria for regulatory
capital instruments, provides for new regulatory capital deductions and adjustments, and modifies methods for
calculating risk-weighted assets (the denominator of risk-based capital ratios) by, among other things, strengthening
counterparty credit risk capital requirements. The Basel III final regulatory framework also introduces a capital
conservation buffer that limits a banking organization’s ability to make capital distributions and discretionary bonus
payments to executive officers if a banking organization fails to maintain a Common Equity Tier 1 capital
conservation buffer of more than 2.5%, on a fully phased-in basis, of total risk-weighted assets above each of the
following minimum risk-based capital ratio requirements: Common Equity Tier 1 (4.5%), Tier 1 (6.0%), and total risk-
based capital (8.0%). This requirement became effective on January 1, 2016, and will be fully phased in by 2019.
The regulatory framework became effective for the Company and E*TRADE Bank on January 1, 2015. The
fully phased-in Basel III capital standards will become effective January 1, 2019 for the Company and E*TRADE
Bank.
Several elements of the Basel III final capital standards had a meaningful impact to us. The vast majority of
margin receivables now qualify for 0% risk-weighting, and we include a larger portion of our deferred tax assets in
regulatory capital, both having a favorable impact on our current capital ratios. A portion of this benefit will be offset
as we phase out TRUPs from the parent company's regulatory capital. In addition, upon adoption, we made the one-
time, permanent election to exclude AOCI from the calculation of Common Equity Tier 1 capital.
The Company’s and 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
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transactions and other factors. Any significant reduction in the Company’s or E*TRADE Bank’s regulatory capital
could result in the Company or E*TRADE Bank being less than "well capitalized" or "adequately capitalized" under
applicable capital standards. A failure of the Company or E*TRADE Bank to be "adequately capitalized" which is not
cured within time periods specified in the indentures governing our senior secured revolving credit facility would
constitute a default under our senior secured revolving credit facility and likely result in any outstanding balance on
the senior secured revolving credit facility becoming immediately due and payable. In addition, if E*TRADE Bank or
E*TRADE Savings Bank are less than “well capitalized” or “adequately capitalized” under applicable capital rules,
the ability of E*TRADE Bank and E*TRADE Savings Bank to receive, renew or roll-over sweep deposits, which are
regarded as broker deposits for purposes of the Federal Deposit Insurance Act, could be impacted. Sweep deposits are
a significant source of liquidity for the savings banks, and if they were terminated by the FDIC, that could have a
material negative effect on our business.
The OCC and the Federal Reserve may request we raise equity to increase the regulatory capital of the
Company or 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 certain business opportunities.
Under applicable law, our activities are restricted to those that are financial in nature and certain real estate-
related activities. Although we believe all of our existing activities and investments are permissible, 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 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 "well capitalized" and "well managed" requirements, we could be subject to activity restrictions that could
prevent us from engaging in certain activities as well as other negative regulatory actions.
In addition, E*TRADE Bank is currently subject to extensive regulation of its activities and investments,
capitalization, community reinvestment, risk management policies and procedures and relationships with affiliated
companies. Acquisitions of and mergers with other financial institutions, purchases of deposits and loan portfolios, the
establishment of new depository institution subsidiaries and the commencement of new activities by bank subsidiaries
require the prior approval of the OCC and the Federal Reserve, and in some cases the FDIC, which may deny approval
or condition their approval on the imposition of limitations on the scope of our planned activity. Also, these regulations
and conditions could affect our ability to realize synergies from future acquisitions, negatively affect us following an
acquisition and also delay or prevent the development, introduction and marketing of new products and services.
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Risks Relating to Owning Our Stock
Our business operations are restricted by the terms of our corporate debt.
Our senior secured revolving credit facility and 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, make distributions or other payments;
repurchase or redeem capital stock;
make investments or other restricted payments;
merge, consolidate or transfer substantially all of our assets; and
enter into transactions with our shareholders or affiliates.
As a result of the covenants and restrictions contained in the documents governing our indebtedness, we are
limited in how we conduct our business and we may be unable to raise additional debt or equity financing at all or on
terms sufficient to compete effectively or to take advantage of new business opportunities. Some of the covenants and
restrictions described above were lifted or modified in connection with the upgrade by rating agencies of our
unsecured debt to “investment grade status” in 2015; however, some covenants and restrictions may be reapplied in the
event our unsecured debt falls below "investment grade status" in the future.
The senior secured revolving credit facility contains certain financial covenants, including that we maintain a
minimum interest coverage ratio (as defined in the senior secured revolving credit facility) of 3.0 to 1.0, a maximum
total leverage ratio, a maximum asset quality ratio, certain capitalization requirements for the parent company and
certain of its subsidiaries and at least $100 million in unrestricted cash at the parent company.
We could be forced to repay immediately any outstanding borrowings under the senior secured revolving
credit facility and outstanding debt securities at their full principal amount if we were to breach these covenants and
did not cure such breach within the cure periods (if any) specified in the respective indentures and senior secured
revolving credit facility. Further, if we experience a change of control, as defined in the indentures or the senior
secured revolving credit facility, we could be required to offer to purchase our debt securities at 101% of their
principal amount or to repay all loans outstanding under the credit facility at their full principal amount plus any
accrued interest or fees.
We cannot assure that we will be able to remain in compliance with these covenants in the future and, if we
fail to comply, we cannot guarantee that we will be able to obtain waivers from the appropriate parties and/or amend
the covenants. In addition, the terms of any future indebtedness could include more restrictive covenants than our
current covenants. Failing to comply with these covenants could have a material adverse effect on our business and
financial condition.
The value of our common stock may be diluted if we need additional funds in the future.
In the future, we may need to raise additional funds via the issuance and sale of our debt and/or equity
instruments, which we may not be able to conduct on favorable terms, if 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 stockholders, without seeking further
stockholder 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.
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The market price of our common stock may continue to be volatile.
From January 1, 2012 through December 31, 2015, the price per share of our common stock ranged from a
low of $7.08 to a high of $31.48. The market price of our common stock has been, and is likely to continue to be,
highly volatile and subject to wide fluctuations. Among the factors that may affect our stock price are the following:
•
•
•
speculation in the investment community or the press about, or actual changes in, our competitive
position, organizational structure, executive team, operations, financial condition, financial reporting
and results, or strategic transactions;
the announcement of new products, services, acquisitions, or dispositions by us or our competitors;
and
increases or decreases in revenues or earnings, changes in earnings estimates by the investment
community, and variations between estimated financial results and actual financial results.
Changes in the stock market generally or as it concerns our industry may also affect our stock price. 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.
We have been a party to litigation related to the decline in the market price of our stock in the past 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 provisions in our organizational documents 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 stockholder 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 stockholders;
the prohibition of stockholder action by written consent; and
advance notice requirements for nominations to the Board or for proposing matters that can be acted
on by stockholders at stockholder meetings.
In addition, certain provisions of our stock incentive plans, management retention and employment
agreements (including severance payments and stock option acceleration), our senior secured credit facility, certain
provisions of Delaware law and certain provisions of the indentures governing certain series of our debt securities that
would require us to offer to purchase such securities at a premium in the event of certain changes in our ownership
may also discourage, delay or prevent someone from acquiring or merging with us, which could limit the opportunity
for our stockholders to receive a premium for their shares of our common stock and could also affect the price that
some investors are willing to pay for our common stock.
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ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
A summary of our significant locations at December 31, 2015 is shown in the following table. Square footage
amounts are net of space that has been sublet or is part of a facility restructuring.
Location
Alpharetta, Georgia
Jersey City, New Jersey
Arlington, Virginia
Sandy, Utah
Menlo Park, California
New York, New York
Approximate Square Footage
260,000
109,000
102,000
66,000
63,000
52,000
All facilities are leased at December 31, 2015. 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 regional branches, ranging in space from approximately 2,500 to 8,000 square feet.
ITEM 3.
LEGAL PROCEEDINGS
Information in response to this item can be found under the heading "Legal Matters" in Note 19—
Commitments, Contingencies and Other Regulatory Matters to Part II. Item 8. Financial Statements and
Supplementary Data in this Annual Report and is incorporated by reference into this item.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the NASDAQ Stock Market under the ticker symbol ETFC.
Price Range of Common Stock
The following table shows the high and low intraday sale prices of our common stock as reported by the
NASDAQ for the periods indicated:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
2014
High
Low
High
Low
$
$
$
$
28.67
31.48
30.66
30.98
$
$
$
$
21.01
27.24
22.66
24.55
$
$
$
$
25.58
23.87
24.57
24.58
$
$
$
$
18.86
19.24
20.13
18.20
The closing sale price of our common stock as reported on the NASDAQ on February 19, 2016 was $22.49
per share. At that date, there were 738 holders of record of our common stock.
Dividends
We have never declared or paid cash dividends on our common stock and have no current plans to do so in
the future. Our ability to pay dividends on our common stock may be restricted by the terms of our current or future
indebtedness.
Share Repurchases
The table below shows the timing and impact of our share repurchases during the three months ended
December 31, 2015 (dollars in millions, except per share amounts):
Total
Number of
Shares
Purchased(1)
1,194
Average
Price Paid
per Share(2)
26.63
$
650,415
1,014,526
1,666,135
$
$
$
30.26
30.00
30.10
Total
Number of
Shares
Purchased as
Part of the
Publicly
Announced
Plan(3)
Maximum Dollar
Value of Shares That
May Yet Be Purchased
Under the Plan(3)
— $
650,000
1,009,971
1,659,971
$
$
$
—
780.3
750.0
750.0
Period
October 1, 2015 - October 31, 2015
November 1, 2015 - November 30, 2015
December 1, 2015 - December 31, 2015
Total
Includes 6,164 shares withheld to satisfy tax withholding obligations associated with restricted shares.
(1)
(2) Excludes commission paid.
(3) On November 19, 2015, the Company publicly announced that its Board of Directors had authorized the repurchase of up to $800 million of
shares of the Company's common stock through March 31, 2017. The timing and exact amount of any common stock repurchases will
depend on various factors, including market conditions and the Company’s capital position. The Company’s share repurchase program does
not include specific price targets, may be executed through open market purchases or privately negotiated transactions, may utilize Rule
10b5-1 plans, and may be suspended or terminated at any time at the Company’s discretion.
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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 Standard & Poor ("S&P") 500 Index and the Dow Jones US Financials Index during the period from December 31,
2010 through December 31, 2015.
E*TRADE Financial Corporation
S&P 500 Index
Dow Jones US Financials Index
12/10
100.00
100.00
100.00
12/11
12/12
49.75
102.11
87.16
55.94
118.45
110.56
12/13
122.75
156.82
148.39
12/14
151.59
178.29
170.04
12/15
185.25
180.75
170.19
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ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in millions, shares in thousands, except per share amounts):
Results of Operations:
Net operating interest income
$ 1,086
$ 1,074
$
969
$ 1,076
$ 1,213
1%
Year Ended December 31,
Variance
2015
2014
2013
2012
2011
2015 vs. 2014
Total net revenue
$ 1,428
$ 1,814
$ 1,723
$ 1,900
$ 2,037
Provision (benefit) for loan losses
Net income (loss)
Basic net earnings (loss) per share
Diluted net earnings (loss) per share
$
$
$
$
(40) $
268
0.92
0.91
$
$
$
36
293
1.02
1.00
$
$
$
$
143
86
0.30
0.29
Weighted average shares—basic
290,762
288,705
286,991
$
$
355
(113) $
$
$ (0.39) $
$ (0.39) $
285,748
441
157
0.59
0.54
267,291
Weighted average shares—diluted
295,011
294,103
292,589
285,748
289,822
(21)%
(211)%
(9)%
(10)%
(9)%
1%
—%
(Dollars in millions):
Financial Condition:
2015
2014
2013
2012
2011
2015 vs. 2014
December 31,
Variance
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
$
$
$
$
$
$
$
$
$
12,589
13,013
7,398
4,613
45,427
29,445
989
8
5,799
$
$
$
$
$
$
$
$
$
12,388
12,248
7,675
5,979
45,530
24,890
1,328
38
5,375
$
$
$
$
$
$
$
$
$
13,592
10,181
6,353
8,123
46,280
25,971
1,726
42
4,856
$
$
$
$
$
$
$
$
$
13,443
9,540
5,804
10,099
47,387
28,393
1,722
43
4,904
$
$
$
$
$
$
$
$
$
15,651
6,080
4,826
12,333
47,940
26,460
1,451
43
4,928
2%
6%
(4)%
(23)%
—%
18%
(26)%
(79)%
8%
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.
25
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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 this item.
OVERVIEW
We are a financial services company that, through our subsidiaries, provides a full suite of online brokerage,
investing and related banking solutions at a competitive price. We provide these services to customers primarily
through our digital platforms and through our network of industry-licensed customer service representatives and
financial consultants. We also operate a bank with the primary purpose of maximizing the value of deposits generated
through our brokerage business.
Our net revenue is generated primarily from our brokerage and banking activities and the resulting net
operating interest income, commissions and fees and service charges. Net operating interest income is largely impacted
by the size of our balance sheet, our balance sheet mix, and average yields on our assets and liabilities. Net operating
interest income is primarily driven from interest earned on the investment of deposits and customer payables into
investment securities, real estate loans and margin receivables, less interest paid on interest-bearing liabilities,
including deposits and customer payables as well as other borrowings. Commissions revenue is generated by customer
trades and is largely impacted by trade volume (DARTs) and commission rates. Fees and service charges revenue is
mainly impacted by order flow revenue and fee-generating customer assets. Our net revenue is offset by operating
expenses, the largest being compensation and benefits, advertising and market development and professional services.
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;
the level and volatility of interest rates;
our ability to move capital to our parent company from our subsidiaries subject to
regulatory approvals or notifications; 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 execute on our business strategy. Refer to Item 1. Business for more information.
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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
2015
2014
2013
2015 vs. 2014
Customer Activity Metrics:
Daily average revenue trades ("DARTs")
155,470
168,474
150,743
Average commission per trade
Margin receivables (dollars in billions)
End of period brokerage accounts(1)
Net new brokerage accounts(1)
Brokerage account attrition rate(1)
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)(2)
E*TRADE Financial Tier 1 leverage ratio(3)
E*TRADE Bank Tier 1 leverage ratio(3)(4)
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)
10.86
7.4
3,213,541
69,618
9.7%
287.9
9.3
41.7
447
9.0%
9.7%
130
353
2.64%
40.8
3,421
$
$
$
$
$
$
$
$
$
10.81
7.7
3,143,923
145,864
8.7%
290.3
10.9
41.1
233
8.1%
10.6%
155
404
2.55%
41.4
3,221
$
$
$
$
$
$
$
$
$
11.13
6.4
2,998,059
94,868
8.8%
260.8
10.4
39.7
415
6.7%
9.5%
271
453
2.33%
40.9
3,009
(8)%
— %
(4)%
2 %
(52)%
1 %
(1)%
(15)%
1 %
92 %
0.9 %
(0.9)%
(16)%
(13)%
0.09 %
(1)%
6 %
(1) Net new brokerage accounts and end of period brokerage accounts were impacted by the closure of 23,150 accounts related to the shutdown
of the Company's global trading platform and the closure of 3,484 accounts related to the escheatment of unclaimed property during the
year ended December 31, 2015. Excluding the impact of these items, brokerage account attrition rate was 8.9% for the year ended
December 31, 2015.
(2) See Liquidity and Capital Resources for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
(3) Beginning in the first quarter of 2015, E*TRADE Financial and E*TRADE Bank calculate regulatory capital under the Basel III framework
using the Standardized Approach, subject to transition provisions. Prior to the first quarter of 2015, the risk-based capital guidelines that
applied to E*TRADE Bank were 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. As a savings and loan holding company, E*TRADE Financial was not previously subject to specific statutory capital
requirements. Therefore, E*TRADE Financial's Tier 1 leverage ratio at December 31, 2014 and December 31, 2013 were non-GAAP
measures and were calculated based on the Federal Reserve’s well-capitalized requirements then applicable to bank holding companies. See
Liquidity and Capital Resources for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
(4) E*TRADE Bank excludes E*TRADE Securities as of February 1, 2015 and E*TRADE Clearing as of July 1, 2015.
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 and 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
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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 new and existing 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 as well as fees and service charges revenue, which
includes fees earned on customer assets held by third parties outside the Company.
Company 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. See Liquidity and
Capital Resources for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
Tier 1 leverage ratio is an indication of capital adequacy for E*TRADE Financial and E*TRADE
Bank. Tier 1 leverage ratio is Tier 1 capital divided by adjusted average total assets for leverage
capital purposes. See Liquidity and Capital Resources for additional information, including the
calculation of regulatory capital ratios and a reconciliation of previously non-GAAP capital ratios to
the comparable GAAP measures.
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 be charged-off.
Allowance for loan losses is an estimate of probable losses inherent in the loan portfolio as of 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").
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
Authorized the repurchase of up to $800 million of shares of our common stock
•
In November 2015, we announced that our Board of Directors authorized the repurchase of up to $800
million of shares of our common stock through March 31, 2017. The timing and exact amount of any
common stock repurchases will depend on various factors, including market conditions and our capital
position. As of December 31, 2015, we have repurchased approximately 1.7 million shares of common
stock at an average price of $30.10 for a total of approximately $50 million. As of February 19, 2016,
we have subsequently repurchased an additional 9.4 million shares of common stock at an average price
of $23.03. Under this publicly announced plan, we have repurchased a total of 11.1 million shares of
common stock for a total of $268 million.
Received Regulatory Approval to Operate E*TRADE Bank at a 8.0% Tier 1 Leverage Ratio and Moved Broker-
Dealers from under E*TRADE Bank
•
•
We received regulatory approval to operate E*TRADE Bank at a 8.0% Tier 1 leverage ratio
beginning early 2016, a full year ahead of expectations, reflecting significant progress on our capital
plan.
We received regulatory approval to move our broker-dealers, E*TRADE Securities and E*TRADE
Clearing, out from under E*TRADE Bank. This new organizational structure provides increased
capital flexibility as it enables us to dividend excess regulatory capital at our broker-dealers to the
parent, subject to regulatory notification.
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•
•
E*TRADE Securities was moved out from under E*TRADE Bank in February 2015. Subsequent to
the move, E*TRADE Securities paid dividends to the parent company of $565 million during 2015
and $24 million in January 2016.
E*TRADE Clearing was moved out from under E*TRADE Bank in July 2015. Prior to this move,
E*TRADE Bank contributed $150 million of capital to E*TRADE Clearing to enhance its capital
and liquidity position. Based on E*TRADE Clearing’s current capital and liquidity position,
E*TRADE Clearing paid a dividend to the parent company of $124 million in February 2016.
$281 Million in Dividends Issued from E*TRADE Bank to the Parent Company
•
We received approval from our regulators for $281 million in dividends from E*TRADE Bank to the
parent company in 2015, totaling $756 million in quarterly dividends from E*TRADE Bank to the
parent company since the third quarter of 2013 and is reflective of progress on our capital plan and
our significantly improved financial position and regulatory standing.
New Sweep Deposit Platform
•
We implemented a new sweep deposit platform which allows us to more efficiently manage our
balance sheet size. During 2015, we utilized this platform to direct a net total of $4.7 billion of
customer assets held at third party institutions back onto our balance sheet.
Terminated $4.4 billion of Legacy Wholesale Funding Obligations
•
We terminated $4.4 billion of legacy wholesale funding obligations, including repurchase
agreements and FHLB advances, in September 2015. In connection with the termination, we
recorded a pre-tax charge of $413 million during the third quarter of 2015. We expect the
termination of the legacy wholesale funding obligations to significantly reduce our funding costs,
thereby improving our ability to generate net income.
E*TRADE Clearing Established a $345 Million Credit Facility
•
E*TRADE Clearing entered into a new $345 million senior unsecured revolving credit facility as an
additional source of liquidity for its operations in June 2015, bringing its total external funding
available to approximately $1 billion as of December 31, 2015.
Generated a $220 Million Income Tax Benefit from Settlement of Internal Revenue Service ("IRS") Examination
•
In May 2015, we settled the IRS examination of our 2007, 2009 and 2010 federal tax returns. The
settlement resulted in the recognition of a $220 million income tax benefit in the second quarter of
2015. The settlement also resulted in an increase in our deferred tax assets.
•
Eliminated $340 Million of Corporate Debt and increased the Credit Facility at the Parent Company by $50 Million
In March 2015, we issued $460 million of 45/8% Senior Notes due 2023. We used the net proceeds
together with $432 million of existing corporate cash to redeem $800 million of 6 3/8% Senior Notes
due 2019, reducing our total corporate debt by $340 million to $1 billion and resulting in a $73
million loss on early extinguishment of debt. These transactions reduced our annual debt service
costs from $80 million to $50 million and extended the maturity profile with no interest-bearing
corporate debt maturing until 2022.
•
We increased our senior secured revolving credit facility by $50 million to $250 million in March
2015, enhancing liquidity at the parent company.
Enhancements to Our Trading and Investing Products and Services
•
We enhanced our digital storefront and core platforms, including revamped welcome, account
overview, and retirement pages, and our tax center on our website, as well as introduced the
TipRanks tool to our platform.
29
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•
•
We made a number of upgrades on our active trader platform, E*TRADE Pro, including a new
options analyzer, new margin analyzer, and new user orientation.
We launched several mobile enhancements, including the addition of conditional orders, multi-leg
options and a new mutual fund trading experience on tablet. We also added several new technologies
available on iOS, including home screen support, Apple Pay, and an Apple Watch app.
Third Party Recognition
•
•
•
Barron’s rated us 4 out of 5 stars in their annual online broker survey, scoring high marks in research
amenities and customer service and education.
Stockbrokers.com gave us three first place awards in their 2015 Online Broker Review: #1
Smartphone App, #1 Client Dashboard and Best New Tool for E*TRADE Browser Trading. In the
same review, we also earned five best-in-class ratings for Offering of Investments, Investor
Education, Research, Mobile Trading, and New Investors.
Equity Edge Online, our corporate stock plan administration and reporting platform, was rated #1 in
Loyalty and Overall Satisfaction by Group Five for the fourth year in a row.
EARNINGS OVERVIEW
2015 Compared to 2014
We generated net income of $268 million, or $0.91 per diluted share, on total net revenue of $1.4 billion for
the year ended December 31, 2015. During 2015, we terminated $4.4 billion of legacy wholesale funding obligations.
We expect this action to significantly reduce our funding costs, thereby improving our ability to generate net income.
In connection with this termination, we recorded a pre-tax charge of $413 million on our consolidated statement of
income, including $43 million of losses on early extinguishment of debt, and $370 million of losses that were
reclassified from accumulated comprehensive loss related to cash flow hedges and included in the gains (losses) on
securities and other line item. Net operating interest income increased 1% to $1.1 billion for the year ended
December 31, 2015 compared to the same period in 2014. Commissions, fees and service charges and other revenue
decreased 3% to $673 million for the year ended December 31, 2015 compared to the same period in 2014. Provision
(benefit) for loan losses was $(40) million for the year ended December 31, 2015 compared to $36 million for the
same period in 2014. Total operating expenses increased 5% to $1.2 billion for the year ended December 31, 2015
compared to the same period in 2014.
The following sections describe in detail the changes in key operating factors and other changes and events
that affected net revenue, provision (benefit) 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 (losses) on securities and other
Other revenues
Total non-interest income (loss)
Total net revenue
*
Percentage not meaningful.
Year Ended December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
$
1,086
$
1,074
$
424
210
—
(331)
39
342
456
200
10
36
38
740
$
1,428
$
1,814
$
12
(32)
10
(10)
(367)
1
(398)
(386)
1 %
(7)%
5 %
(100)%
*
3 %
(54)%
(21)%
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Net Operating Interest Income
Net operating interest income increased 1% to $1.1 billion for the year ended December 31, 2015 compared
to the same period in 2014. Net operating interest income is earned primarily through investing deposits and customer
payables in assets including: available-for-sale securities, held-to-maturity securities, margin receivables and real
estate loans.
The following table presents enterprise average balance sheet data and enterprise income and expense data for
our operations, as well as the related net interest spread, yields and rates prepared on the basis required by the SEC’s
Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" (dollars in millions):
2015
2014
2013
Year Ended December 31,
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
Total enterprise interest-earning assets
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
Time deposits
Customer payables
Securities sold under agreements to
repurchase(3)
FHLB advances and other borrowings(3)
Securities loaned and other
Total enterprise interest-bearing
liabilities
Non-operating interest-bearing and non-
interest bearing liabilities(4)
Total liabilities
Total shareholders’ equity
$ 5,651
$
12,541
12,201
7,884
1,572
425
527
40,801
4,668
$ 45,469
$ 20,638
3,534
807
1,127
43
6,435
2,490
1,010
1,759
1,970
39,813
5,656
Total liabilities and shareholders’
equity
$ 45,469
230
245
346
276
3
1
115
1,216
4.06% $ 7,298
$
1.95%
12,761
2.84%
11,288
3.50%
0.19%
0.15%
21.90%
7,446
1,279
736
629
297
289
328
264
2
1
98
4.07% $ 9,569
$
2.26%
13,074
2.90%
3.55%
0.15%
0.10%
15.68%
9,772
5,929
1,434
457
657
395
280
255
224
3
—
51
2.98%
41,437
1,279
3.08%
40,892
1,208
4,383
$ 45,820
4,624
$ 45,516
4
—
—
—
—
5
69
48
3
0.02% $ 19,168
0.01%
0.01%
0.03%
0.38%
0.07%
2.76%
4.73%
0.19%
4,009
867
1,069
58
6,417
3,993
1,288
1,518
2,272
40,659
5,161
$ 45,820
11
1
—
—
1
9
148
68
—
238
7
1
—
—
—
8
123
65
—
204
0.03% $ 19,432
0.01% $ 4,582
0.01% $
941
0.03% $ 1,007
0.55% $
81
0.13%
5,494
3.07%
5.05%
0.03%
4,466
1,291
860
0.53%
38,154
2,490
40,644
4,872
$ 45,516
37,843
129
0.34%
38,387
4.12%
2.14%
2.61%
3.78%
0.20%
0.10%
7.76%
2.95%
0.06%
0.01%
0.01%
0.03%
1.11%
0.15%
3.32%
5.29%
0.02%
0.62%
Excess of enterprise interest-earning assets
over enterprise interest-bearing liabilities/
Enterprise net interest income/Spread(5)
$ 2,958
$
1,087
2.64% $ 3,050
$
1,075
2.55% $ 2,738
$
970
2.33%
(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 property and equipment, net, goodwill, other intangibles, net and
(3)
other assets that do not generate operating interest income. Some of these assets generate corporate interest income.
In September 2015, we terminated $4.4 billion of legacy wholesale funding obligations and recorded a pre-tax charge of $413 million on
our consolidated statement of income.
(4) Non-operating interest-bearing and non-interest bearing liabilities consist of corporate debt and other liabilities that do not generate
operating interest expense. Some of these liabilities generate corporate interest expense.
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(5) Enterprise net interest spread represents 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. The taxable equivalent adjustment
to reconcile to net operating interest income was $1 million for each of the years ended December 31, 2015, 2014 and 2013.
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,
2015
2014
2013
2.64%
2.66%
2.55%
2.59%
2.33%
2.37%
107.82%
107.95%
107.18%
0.59%
4.75%
12.44%
0.64%
5.69%
11.26%
0.19%
1.77%
10.70%
Average enterprise interest-earning assets decreased 2% to $40.8 billion for the year ended December 31,
2015 compared to the same period in 2014. The fluctuation in enterprise interest-earning assets is driven primarily by
changes in enterprise interest-bearing liabilities, specifically deposits and customer payables. The increase in funding
from these two liabilities for the year ended December 31, 2015 was more than offset by the decrease in interest-
earning assets mainly due to the sale of securities and cash used to terminate $4.4 billion of legacy wholesale funding
obligations during the third quarter of 2015.
Average enterprise interest-bearing liabilities decreased 1% to $37.8 billion for the year ended December 31,
2015 compared to the same period in 2014. The decrease was primarily due to the termination of our legacy wholesale
funding obligations during the third quarter of 2015, partially offset by increases in deposits.
As of December 31, 2015, $11.2 billion of our customers' assets were held at third party institutions.
Approximately 60% of these off-balance sheet assets resulted from our deleveraging efforts completed in prior
periods, with the remaining 40% primarily held in municipal funds and other customer assets held by third parties that
we do not have the ability to bring back on our balance sheet. We estimate the impact of our deleveraging efforts on
net operating interest income at December 31, 2015 to be approximately 135 basis points based on the estimated
current re-investment rates on these assets, less approximately 7 basis points of cost associated with holding these
assets on our balance sheet, primarily FDIC insurance premiums. We consider our deleveraging initiatives to be
complete and we maintain the ability to transfer the majority of these customer assets to our balance sheet with
notification to the third party institutions and customer consent, as appropriate. During 2015, we transferred a net total
of $4.7 billion of customer assets held by third parties to our balance sheet and we intend to continue to do so until we
reach our targeted consolidated balance sheet size during the second quarter of 2016. For additional information on
customer assets held by third parties, see the Balance Sheet Overview—Deposits section.
Enterprise net interest spread increased by 9 basis points to 2.64% for the year ended December 31, 2015
compared to the same period in 2014. Enterprise net interest spread is driven by changes in average balances and
average interest rates earned or paid on those balances. The increase was primarily due to lower borrowing costs
resulting from the termination of $4.4 billion of legacy wholesale funding obligations during the third quarter of 2015.
In addition, for the year ended December 31, 2015, revenue earned from our margin and securities lending activities
increased. These increases were partially offset by the continued run-off of our legacy loan portfolio along with lower
rates earned on investment securities. Enterprise net interest spread may further fluctuate based on the size and mix of
the balance sheet, as well as the impact from the interest rate environment.
Commissions
Commissions revenue decreased 7% to $424 million for the year ended December 31, 2015 compared to the
same period in 2014. The main factors that affect commissions revenue are DARTs, average commission per trade and
the number of trading days.
DART volume decreased 8% to 155,470 for the year ended December 31, 2015 compared to the same period
in 2014. Option-related DARTs as a percentage of total DARTs represented 23% of trading volume for year ended
December 31, 2015, compared to 22% in 2014. DARTs via mobile applications as a percentage of total DARTs
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represented 15% of trading volume for the year ended December 31, 2015 compared to 11% for the same period in
2014.
Average commission per trade increased slightly to $10.86 for the year ended December 31, 2015 from
$10.81 for the same period in 2014. 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).
Fees and Service Charges
Fees and service charges increased 5% to $210 million for the year ended December 31, 2015 compared to
the same period in 2014. The table below shows the components of fees and service charges and the resulting
variances (dollars in millions):
Year Ended December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
Order flow revenue
Mutual fund service fees
Advisor management fees
Foreign exchange revenue
Reorganization fees
Money market funds and sweep deposits revenue(1)
Other fees and service charges
$
$
85
27
27
15
12
23
21
$
92
23
23
16
8
14
24
Total fees and service charges
$
210
$
200
$
(7)
4
4
(1)
4
9
(3)
10
(8)%
17 %
17 %
(6)%
50 %
64 %
(13)%
5 %
(1)
Includes revenue earned on average customer assets held by third parties outside the Company, including money market funds and sweep
deposit accounts at unaffiliated financial institutions. Fees earned on these customer assets are based on the federal funds rate or LIBOR
plus a negotiated spread or other contractual arrangement with the third party institutions.
The increase in fees and services charges for the year ended December 31, 2015, compared to the same period
in 2014, was primarily driven by increased money market funds and sweep deposits revenue due to increased rates
earned on sweep deposit accounts and on customer assets in money market funds held by third parties.
Principal Transactions
There was no principal transactions revenue for the year ended December 31, 2015, compared to $10 million
for the same period in 2014. Principal transactions were derived from our market making business in which we acted
as a market-maker for our brokerage customers’ orders as well as orders from third party customers. On February 10,
2014, we completed the sale of the market making business and no longer generate principal transactions revenue.
33
Table of Contents
Gains (Losses) on Securities and Other
The table below shows the components of gains (losses) on securities and other and the resulting variances
(dollars in millions):
Reclassification of deferred losses on cash flow hedges
Hedge ineffectiveness
Gains on available-for-sale securities, net
Gains (losses) on loans, net
Gains (losses) on securities and other
*
Percentage not meaningful.
Year Ended December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
$
$
(370) $
(1)
38
2
(331) $
— $
(10)
42
4
36
$
(370)
9
(4)
(2)
(367)
*
*
(10)%
(50)%
*
Gains (losses) on securities and other were $(331) million for the year ended December 31, 2015 compared to
$36 million for the same period in 2014. The activity for the year ended December 31, 2015 included $370 million of
losses reclassified from accumulated comprehensive loss related to cash flow hedges as a result of the termination of
legacy wholesale funding obligations. The activity for the year ended December 31, 2014 included a gain of $7 million
on the sale of one- to four-family loans modified as TDRs and a gain of $6 million recognized on the sale of our
remaining available-for-sale non-agency CMOs.
Provision (Benefit) for Loan Losses
We recognized a benefit for loan losses of $40 million for the year ended December 31, 2015 compared to a
provision of $36 million for the same period in 2014. The benefit for loan losses reflected a decrease in allowance for
loan losses due to continued improvement in economic conditions, recoveries of previous charge-offs and loan
portfolio run-off, offset by an increase in allowance due to enhancements to our modeling practices for the allowance
for loan losses during the year ended December 31, 2015. For additional information on management's estimate of the
allowance for loan losses, see Summary of Critical Accounting Policies and Estimates. The timing and magnitude of
the provision (benefit) for loan losses is affected by many factors that could result in variability, particularly as
mortgage loans reach the end of their interest-only period.
34
Table of Contents
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
Restructuring and other exit activities
Other operating expenses
Total operating expense
Compensation and Benefits
Year Ended December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
$
$
466
124
95
41
103
88
90
81
20
17
82
1,207
$
$
412
120
94
79
112
79
71
78
22
8
70
1,145
$
$
54
4
1
(38)
(9)
9
19
3
(2)
9
12
62
13 %
3 %
1 %
(48)%
(8)%
11 %
27 %
4 %
(9)%
113 %
17 %
5 %
Compensation and benefits increased 13% to $466 million for the year ended December 31, 2015 compared
to the same periods in 2014. The increase was primarily due to increased salaries expense driven by an increase in
headcount of 6% and increased incentive compensation, compared to the same period in 2014. Compensation and
benefits also included $6 million of executive severance costs during the year ended December 31, 2015.
FDIC Insurance Premiums
FDIC insurance premiums decreased 48% to $41 million for the year ended December 31, 2015 compared to
the same period in 2014. The decrease was primarily driven by reduced rate assessments due to continued
improvement and quality of our balance sheet, improving capital ratios and overall risk profile, compared to the same
periods in 2014. These drivers and the resulting decrease in FDIC insurance premiums are indications of the important
progress made on our capital plan.
Communications
Communications expense increased 27% to $90 million for the year ended December 31, 2015 compared to
the same period in 2014. The increase was primarily driven by third party contract charges of $12 million recognized
in 2015.
Restructuring and other exit activities
Restructuring and other exit activities expense increased 113% to $17 million for the year ended
December 31, 2015 compared to the same period in 2014. This line item includes costs related to both department and
business reorganizations, such as the shutdown of certain of our international operations. The increase was primarily
driven by $6 million executive severance for an eliminated position during the year ended December 31, 2015. In
addition, the prior period included a $4 million gain on the sale of the market making business, which was completed
in February 2014.
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Table of Contents
Other Operating Expenses
Other operating expenses increased 17% to $82 million for the year ended December 31, 2015 compared to
the same period in 2014. The increase during the year ended December 31, 2015 was primarily driven by a $9 million
expense related to a third party contract amendment executed during 2015.
Other Income (Expense)
Other income (expense) was a net expense of $170 million and $181 million for the years ended
December 31, 2015 and 2014, respectively, as shown in the following table (dollars in millions):
Corporate interest expense
Losses on early extinguishment of debt
Other
Total other income (expense)
Year Ended December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
$
$
(65) $
(112)
7
(170) $
(113) $
(71)
3
(181) $
48
(41)
4
11
(42)%
58 %
133 %
(6)%
Corporate interest expense was $65 million for year ended December 31, 2015 compared to $113 million for
the same period in 2014. The decrease in corporate interest expense was driven by corporate debt refinances and
corporate debt reductions which have reduced our annual debt service cost. See Note 13—Corporate Debt in Item 8.
Financial Statements and Supplementary Data for additional information on the debt refinance transactions executed
during the periods presented.
Losses on early extinguishment of debt was $112 million for the year ended December 31, 2015. This amount
includes a loss of $43 million resulting from our termination of $4.4 billion of legacy wholesale funding obligations
during 2015, offset by a $4 million net gain resulting from the redemption of $19 million of TRUPs during 2015. In
addition, during the years ended December 31, 2015 and 2014, we recorded losses on early extinguishment of debt of
$73 million and $59 million, respectively, as a result of the corporate debt refinance transactions referenced above.
During the year ended December 31, 2014, we also recorded a $12 million loss on early extinguishment of debt as a
result of the early extinguishment of $100 million in repurchase agreements.
Income Tax Expense (Benefit)
Income tax expense (benefit) was $(177) million and $159 million for the year ended December 31, 2015 and
December 31, 2014, respectively. The effective tax rate was (195)% for the year ended December 31, 2015, compared
to 35% in 2014.
During 2015, we settled the IRS examination of our 2007, 2009 and 2010 federal tax returns resulting in the
recognition of a $220 million income tax benefit. The income tax benefit resulted from the release of related reserves
for uncertain tax positions, the majority of which increased our deferred tax assets. See Balance Sheet Overview for
further discussion on deferred tax assets at December 31, 2015. During 2009, we incurred a loss on the exchange of
$1.7 billion interest-bearing corporate debt for non-interest-bearing convertible debentures. The uncertain tax positions
were primarily related to whether certain components of that loss were considered deductible or non-deductible for tax
purposes. Excluding the impact of the settled IRS examination, the effective tax rate would have been 47% for the year
ended December 31, 2015, respectively, calculated in the following table (dollars in millions):
Twelve Months Ended December 31, 2015
Pre-tax Income
Tax Expense
(Benefit)
Tax Rate
Income taxes and tax rate before impact of settled IRS examination(1) $
Impact of settled IRS examination
Income taxes and tax rate as reported
$
91
—
91
$
$
43
(220)
(177)
47 %
(242)%
(195)%
(1)
Income taxes and tax rate before impact of settled IRS examination includes the impact of non-deductible items. See Note 14—Income
Taxes in Item 8. Financial Statements and Supplementary Data for additional information on the effective tax rate reconciliation.
36
Table of Contents
Valuation Allowance
Our net deferred tax asset was $1.0 billion and $951 million at December 31, 2015 and 2014, respectively.
As of December 31, 2015, we did not establish a valuation allowance against our federal deferred tax assets as we
believe that it is more likely than not that all of these assets will be realized. Certain of the deferred tax assets result
from net operating losses that are subject to Section 382 annual use limitations. We expect these deferred tax assets
subject to limitations to be fully utilized before expiration and therefore, no valuation allowance against these assets
has been established. We expect to utilize the majority of the existing federal deferred tax assets within the next three
years.
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, 2015, we had total state deferred tax assets, net of
federal benefit, of approximately $177 million related to our state net operating loss carryforwards and temporary
differences with a valuation allowance of $65 million against such deferred tax assets.
2014 Compared to 2013
We generated net income of $293 million, or $1.00 per diluted share, on total net revenue of $1.8 billion for
the year ended December 31, 2014. Net operating interest income increased 11% to $1.1 billion for the year ended
December 31, 2014 compared to 2013, which was driven primarily by the size and mix of the balance sheet as well as
an increase in net interest spread. Commissions, fees and service charges and other revenue increased 11% to $694
million for the year ended December 31, 2014, compared to 2013, which was driven primarily by increased order flow
revenue and advisor management fees, in addition to increased trading activity. The increases were partially offset by a
decrease in principal transactions following our exit of the market making business, and a decrease in gains (losses) on
securities and other for the year ended December 31, 2014 when compared to 2013.
Provision for loan losses decreased 75% to $36 million for the year ended December 31, 2014 compared to
2013. The decrease was driven primarily by improving economic conditions, as evidenced by the lower levels of
delinquent loans in the one- to four-family and home equity loan portfolios, lower net charge-offs, home price
improvement and loan portfolio run-off. Total operating expenses decreased 10% to $1.1 billion for the year ended
December 31, 2014, compared to 2013, which was driven primarily by $142 million in impairment of goodwill that
was recognized in 2013 which increased operating expenses for the year ended December 31, 2013.
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.
Revenue
The components of revenue and the resulting variances are as follows (dollars in millions):
Year Ended December
31,
Variance
2014 vs. 2013
2014
2013
Amount
%
$ 1,074
$
456
200
10
36
—
38
$
969
420
168
73
61
(3)
35
740
754
$ 1,814
$ 1,723
$
105
36
32
(63)
(25)
3
3
(14)
91
11 %
9 %
19 %
(86)%
(41)%
*
9 %
(2)%
5 %
Net operating interest income
Commissions
Fees and service charges
Principal transactions
Gains (losses) on securities and other
Net impairment
Other revenues
Total non-interest income
Total net revenue
*
Percentage not meaningful.
37
Table of Contents
Net Operating Interest Income
Net operating interest income increased 11% to $1.1 billion for the year ended December 31, 2014 compared
to 2013. Net operating interest income is earned primarily through investing deposits and customer payables in assets
including: available-for-sale securities, held-to-maturity securities, margin receivables and real estate loans.
The fluctuation in enterprise interest-earning assets was driven primarily by changes in enterprise interest-
bearing liabilities, specifically deposits and customer payables. Average enterprise interest-earning assets increased 1%
to $41.4 billion for the year ended December 31, 2014, compared to 2013. The increase in average enterprise interest-
earning assets was primarily a result of increases in average held-to-maturity securities and margin receivables, which
were partially offset by a decrease in average loans compared to 2013.
Average enterprise interest-bearing liabilities increased 1% to $38.4 billion for the year ended December 31,
2014, compared to 2013. The increase in average enterprise interest-bearing liabilities was primarily due to increases
in average customer payables and securities loaned and other, partially offset by decreases in average deposits and
securities sold under agreements to repurchase.
As part of our strategy to strengthen our overall financial and franchise position, we focused on improving
our capital ratios by reducing risk and deleveraging the balance sheet. Our deleveraging strategy included transferring
customer deposits to third party institutions. At December 31, 2014, $15.5 billion of our customers' assets were held at
third party institutions, including third party banks and money market funds. Approximately 72% of these off-balance
sheet assets resulted from our deleveraging efforts. We estimate the impact of our deleveraging efforts on net operating
interest income at December 31, 2014 to be approximately 125 basis points based on the estimated current re-
investment rates on these assets, less approximately 28 basis points of cost associated with holding these assets on our
balance sheet, primarily FDIC insurance premiums.
Enterprise net interest spread increased 22 basis points to 2.55% for the year ended December 31, 2014
compared to 2013. The increase in enterprise net interest spread was driven by changes in average balances and
average interest rates earned or paid on those balances. During the year ended December 31, 2014, the increase in
enterprise net interest spread was driven primarily by the growth in margin receivables and increased revenue earned
from our securities lending activities, along with lower wholesale borrowing costs due to a decrease in securities sold
under agreements to repurchase. These increases were partially offset by the continued run-off in loans and lower rates
earned on margin receivables.
Commissions
Commissions revenue increased 9% to $456 million for the year ended December 31, 2014 compared to
2013. DART volume increased 12% to 168,474 for the year ended December 31, 2014 compared to 2013. Option-
related DARTs as a percentage of total DARTs represented 22% of trading volume for the year ended December 31,
2014, compared to 24% in 2013. Average commission per trade decreased 3% to $10.81 for the year ended
December 31, 2014 compared to 2013.
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Table of Contents
Fees and Service Charges
Fees and service charges increased 19% to $200 million for the year ended December 31, 2014 compared to
2013. The table below shows the components of fees and service charges and the resulting variances (dollars in
millions):
Year Ended
December 31,
Variance
2014 vs. 2013
2014
2013
Amount
%
Order flow revenue
Mutual fund service fees
Advisor management fees
Foreign exchange revenue
Reorganization fees
Money market funds and sweep deposits revenue(1)
Other fees and service charges
Total fees and service charges
$
$
92
23
23
16
8
14
24
72
21
14
15
9
13
24
$ 200
$ 168
$
$
20
28 %
10 %
64 %
7 %
(11)%
8 %
0 %
19 %
2
9
1
(1)
1
—
32
(1)
Includes revenue earned on average customer assets held by third parties outside the Company, including money market funds and sweep
deposit accounts at unaffiliated financial institutions. Fees earned on these customer assets are based on the federal funds rate or LIBOR
plus a negotiated spread or other contractual arrangement with the third party institutions.
The increase in fees and services charges for the year ended December 31, 2014, compared to 2013, was
driven primarily by increased order flow revenue as a result of increased trading volumes and as E*TRADE Securities
began routing all of its order flow to third parties following the sale of G1 Execution Services, LLC which was
completed on February 10, 2014. In addition, advisor management fees increased, driven by assets in managed
accounts within our retirement, investing and savings products, which were $3.1 billion at December 31, 2014,
compared to $2.4 billion at December 31, 2013.
Principal Transactions
Principal transactions decreased 86% to $10 million for the year ended December 31, 2014 compared to
2013. Principal transactions were derived from our market making business in which we acted as a market-maker for
our brokerage customers’ orders as well as orders from third party customers. On February 10, 2014, we completed the
sale of the market making business and no longer generate principal transactions revenue.
Gains (Losses) on Securities and Other
The table below shows the components of gains (losses) on securities and other and the resulting variances
(dollars in millions):
Gains (losses) on loans, net
Gains on available-for-sale securities, net
Hedge ineffectiveness
Gains on securities, net
Gains (losses) on securities and other
*
Percentage not meaningful.
Year Ended December 31,
2014
2013
$
$
4
42
(10)
32
36
$
$
Variance
2014 vs. 2013
Amount
5
(19)
(11)
(30)
(25)
(1) $
61
1
62
61
$
%
*
(31)%
*
(48)%
(41)%
39
Table of Contents
Gains on securities and other decreased 41% to $36 million for the year ended December 31, 2014 compared
to 2013. The activity for the year ended December 31, 2014 included a $7 million gain recognized on the sale of one-
to four-family loans modified as TDRs and a $6 million gain recognized on the sale of our remaining available-for-sale
non-agency CMOs.
Provision (Benefit) for Loan Losses
Provision for loan losses decreased 75% to $36 million for the year ended December 31, 2014 compared to
2013. The decrease in provision for loan losses was driven primarily by improving economic conditions, as evidenced
by the lower levels of delinquent loans in the one- to four-family and home equity loan portfolios, lower net charge-
offs, home price improvement and loan portfolio run-off for the year ended December 31, 2014. The reduction in the
provision for loan losses was partly offset by enhancements in our quantitative allowance methodology. During the
year ended December 31, 2014, we enhanced our quantitative allowance methodology to identify higher risk home
equity lines of credit and extend the period of management’s forecasted loan losses captured within the general
allowance to include the total probable loss on a subset of identified higher risk home equity lines of credit. These
enhancements drove the migration of estimated losses previously captured on these loans from the qualitative
component to the quantitative component of the general allowance, and drove the majority of the provision for loan
losses within the home equity portfolio during the year ended December 31, 2014.
For the year ended December 31, 2013, we evaluated and refined our default assumptions related to a subset
of the home equity line of credit portfolio that will require borrowers to repay the loan in full at the end of the draw
period, commonly referred to as "balloon loans". We recorded additional provision related to $235 million of balloon
loans at December 31, 2013. We increased our default assumptions and extended the period of management's
forecasted loan losses captured within the general allowance to include the total probable loss on the higher risk
balloon loans as a result of our evaluation. The overall impact of these refinements drove the substantial majority of
provision for loan losses during the year ended December 31, 2013.
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
Impairment of goodwill
Restructuring and other exit activities
Other operating expenses
Total operating expense
*
Percentage not meaningful.
Compensation and Benefits
Year Ended
December 31,
2014
2013
$
412
120
94
79
112
79
71
78
22
—
8
70
$ 1,145
$
363
108
124
104
85
73
69
89
24
142
28
66
$ 1,275
Variance
2014 vs. 2013
Amount
49
$
12
(30)
(25)
27
6
2
(11)
(2)
(142)
(20)
4
$ (130)
%
13 %
11 %
(24)%
(24)%
32 %
8 %
3 %
(12)%
(8)%
*
(71)%
6 %
(10)%
Compensation and benefits increased 13% to $412 million for the year ended December 31, 2014 compared
to 2013. The increase resulted primarily from increased salaries expense due to increased headcount and increased
incentive compensation when compared to 2013.
40
Table of Contents
Advertising and Market Development
Advertising and market development expense increased 11% to $120 million for the year ended
December 31, 2014 compared to 2013. The increase in advertising and market development resulted primarily from
the launch of Type E*, our new brand platform during the year ended December 31, 2014, in addition to lower
advertising and market development expenses during the year ended December 31, 2013 driven by the expense
reduction initiatives in the prior period.
Clearing and Servicing
Clearing and servicing decreased 24% to $94 million for the year ended December 31, 2014 compared to
2013. The decrease resulted primarily from a decrease in clearing fees as a result of the sale of the market making
business which was partially offset by costs associated with an increase in trading volumes, when compared to 2013.
Additionally, servicing fees decreased when compared to the same period in 2013 as the loan portfolio continued to
run off.
FDIC Insurance Premiums
FDIC insurance premiums decreased 24% to $79 million for the year ended December 31, 2014 compared to
the same period in 2013. The decrease was due to the sale of $0.8 billion of our one- to four-family loans modified as
TDRs during the second quarter of 2014, as well as continued improvement and quality of our balance sheet,
improving capital ratios and overall risk profile when compared to 2013. TDRs are considered underperforming assets
and are assessed at a higher rate in the FDIC insurance calculation.
Professional Services
Professional services increased 32% to $112 million for the year ended December 31, 2014 compared to
2013, primarily driven by professional services engagements focused on improving the customer experience and
overall product offering, as well as our continued enterprise risk management build-out.
Impairment of Goodwill
Impairment of goodwill was $142 million for the year ended December 31, 2013. At the end of June 2013, we
decided to exit the market making business, and as a result recorded $142 million in goodwill impairment,
representing the entire carrying amount of goodwill allocated to this business. There were no similar charges during
the year ended December 31, 2014.
Restructuring and Other Exit Activities
Restructuring and other exit activities were $8 million for the year ended December 31, 2014 compared to
$28 million for 2013. The costs in 2014 were driven by severance costs incurred primarily related to our exit of the
market making business, and were partially offset by the $4 million gain on the sale of that business, which was
completed in February 2014. The costs in 2013 were driven primarily by severance costs incurred as part of the
expense reduction initiatives in prior periods.
Other Income (Expense)
Other income (expense) increased 65% to $181 million for the twelve months ended December 31, 2014
compared to the same period in 2013, as shown in the following table (dollars in millions):
Corporate interest expense
Losses on early extinguishment of debt
Equity in income of investments and other
Total other income (expense)
*
Percentage not meaningful.
41
Year Ended
December 31,
Variance
2014 vs. 2013
2014
2013
Amount
%
$ (113) $ (114) $
(71)
3
—
4
$ (181) $ (110) $
1
(71)
(1)
(71)
(1)%
*
(25)%
65 %
Table of Contents
Total other income (expense) primarily consisted of corporate interest expense of $113 million for year ended
December 31, 2014, compared to $114 million in 2013. In addition, during the year ended December 31, 2014, we
recognized $12 million of losses on early extinguishment of debt as a result of the early extinguishment of $100
million in repurchase agreements, and $59 million of losses on early extinguishment of debt as a result of the
redemption of all of the outstanding 6 3/4% Senior Notes due 2016 and 6% Senior Notes due 2017, a total of $940
million in aggregate principal amount.
Income Tax Expense
Income tax expense was $159 million and $109 million for the years ended December 31, 2014 and 2013,
respectively. The effective tax rate was 35% for the year ended December 31, 2014, compared to 56% in 2013.
Income tax expense for the year ended December 31, 2014 included $8 million of benefit primarily related to the
settlement of a state tax audit and $8 million of benefit related to a recent change to the New York state tax code and
its impact on state deferred taxes.
At the end of June 2013, we decided to exit the market making business, and as a result recorded $142
million in goodwill impairment during the year ended December 31, 2013. The $142 million goodwill impairment
charge associated with the market making business was non-deductible for tax purposes. In addition, the overall state
apportionment increased significantly in California as a result of the decision to exit of the market making business.
Therefore, we recognized a tax benefit of $24 million during the year ended December 31, 2013, the majority of which
consisted of releasing valuation allowances for net operating losses, research and development credits and revaluation
of other deferred tax assets relating to California. Excluding the impact of our decision to exit of the market making
business, the effective tax rate for the year ended December 31, 2013 would have been 40%, calculated in the
following table (dollars in millions):
Taxes and tax rate before impact of exit of market making
business
Impact of exit of market making business:
Goodwill impairment charge
State apportionment change
Income taxes and tax rate as reported
Valuation Allowance
For the Year Ended December 31, 2013
Pre-tax Income
Tax Expense (Benefit)
Tax Rate
$
$
337
$
133
40%
(142)
—
195
$
—
(24)
109
56%
Our net deferred tax asset was $951 million and $1.2 billion at December 31, 2014 and 2013, respectively.
We are required to establish a valuation allowance for deferred tax assets and record a corresponding increase to
income tax expense if it is determined, based on evaluation of available evidence at the time the determination is
made, that it is more likely than not that some 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. As of December 31, 2014, we did not establish a valuation allowance
against our federal deferred tax assets as we believe that it is more likely than not that all of these assets will be
realized.
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, 2014, we had total state deferred tax assets, net of
federal benefit, of approximately $143 million related to our state net operating loss carryforwards and temporary
differences with a valuation allowance of $48 million against such deferred tax assets.
42
Table of Contents
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; and
corporate services. Balance sheet management includes the management of asset allocation; loans previously
originated by the Company or purchased from third parties; deposits and customer payables; and credit, liquidity and
interest rate risk for the Company as described in Risk Management. 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 customer activity metrics
as of and for the years ended December 31, 2015, 2014 and 2013 (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
Trading and investing income
Key Customer Activity Metrics:
DARTs
Average commission per trade
Margin receivables (dollars in billions)
End of period brokerage accounts(1)
Net new brokerage accounts(1)
Brokerage account attrition rate(1)
Customer assets (dollars in billions)
Net new brokerage assets (dollars in billions)
Brokerage related cash (dollars in billions)
*
Percentage not meaningful.
Year Ended December 31,
Variance
2015 vs. 2014
2015
2014
2013
Amount
%
$
$
$
$
$
$
$
702
424
209
—
34
1,369
827
542
155,470
10.86
7.4
3,213,541
69,618
9.7%
287.9
9.3
41.7
$
$
$
$
$
$
$
618
456
199
10
32
1,315
766
549
168,474
10.81
7.7
3,143,923
145,864
8.7%
290.3
10.9
41.1
$
$
$
$
$
$
$
527
420
166
73
31
1,217
883
334
150,743
11.13
6.4
2,998,059
94,868
8.8%
260.8
10.4
39.7
$
$
$
$
$
$
$
84
(32)
10
(10)
2
54
61
(7)
14 %
(7)%
5 %
(100)%
6 %
4 %
8 %
(1)%
(13,004)
0.05
(0.3)
69,618
(8)%
— %
(4)%
2 %
(76,246)
(52)%
1%
(2.4)
(1.6)
0.6
*
(1)%
(15)%
1 %
(1) Net new brokerage accounts and end of period brokerage accounts were impacted by the closure of 23,150 accounts related to the shutdown
of the Company's global trading platform and the closure of 3,484 accounts related to the escheatment of unclaimed property during the
year ended December 31, 2015. Excluding the impact of these items, brokerage account attrition rate was 8.9% for the year ended
December 31, 2015.
The trading and investing segment offers products and services to individual retail investors, generating
revenue from these customer relationships and from corporate services activities. This segment currently generates
four main sources of revenue: net operating interest income; commissions; fees and service charges; 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
deposits and customer payables 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. 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. For the
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years ended December 31, 2015 and 2014, our brokerage products contributed 78% and 80%, respectively, and our
banking products contributed 22% and 20%, respectively, of total trading and investing net revenue.
2015 Compared to 2014
Trading and investing income decreased 1% to $542 million for the year ended December 31, 2015,
compared to the same period in 2014, primarily driven by increased operating expense and decreased commission
revenue, partially offset by increased net operating interest income.
Trading and investing net operating interest income increased 14% to $702 million for the year ended
December 31, 2015, respectively, compared to the same period in 2014. The increase for the year ended December 31,
2015 was driven by increased interest income of $54 million from the deposit transfer pricing arrangement with the
balance sheet management segment mainly due to an increase in the rate caused by a reduction in offsetting FDIC
insurance expense, a $12 million increase in income from margin loans due to higher margin receivables during the
period and an increase of $17 million due to higher yields on securities lending activities.
Trading and investing commissions revenue decreased 7% to $424 million for the year ended December 31,
2015, respectively, compared to the same period in 2014. Commissions revenue during the year ended December 31,
2015 decreased mainly driven by a decrease in DARTs of 8%, slightly offset by an increase in average commission per
trade, when compared to the same period in 2014.
Trading and investing fees and service charges increased 5% to $209 million for the year ended December 31,
2015, compared to the same period in 2014. The increase in fees and services charges was driven primarily by
increased money market funds and sweep deposits revenue of $9 million due to increased rates earned on sweep
deposits accounts and on customer assets in money market funds held by third parties.
There was no principal transactions revenue for the year ended December 31, 2015, compared to $10 million
for the same period in 2014. Principal transactions were derived from our market making business in which we acted
as a market-maker for our brokerage customers’ orders as well as orders from third party customers. During 2014, we
completed the sale of the market making business and no longer generate principal transactions revenue.
Trading and investing operating expense increased 8% to $827 million for the year ended December 31, 2015
compared to the same period in 2014. The increase was primarily driven by an increase of $25 million in
compensation and benefits expenses, driven by higher headcount and increased incentive compensation, an increase of
$18 million in communications expense and an increase of $10 million in occupancy costs, partially offset by a
decrease of $11 million in fees paid for professional services, compared to the same period in 2014. In addition, the
increase was also driven by a $9 million expense related to a third party contract amendment during 2015.
As of December 31, 2015, we had approximately 3.2 million brokerage accounts, 1.4 million stock plan
accounts and 0.3 million banking accounts, which was a slight increase from 3.1 million brokerage accounts, 1.3
million stock plan accounts and 0.4 million banking accounts at December 31, 2014.
2014 Compared to 2013
Trading and investing income increased 64% to $549 million for the year ended December 31, 2014
compared to 2013. We continued to generate net new brokerage accounts, ending the fourth quarter of 2014 with 3.1
million accounts. Brokerage related cash, which is one of our most profitable sources of funding, increased by $1.4
billion to $41.1 billion when compared to 2013.
Trading and investing net operating interest income increased 17% to $618 million for the year ended
December 31, 2014 driven primarily by the growth in margin receivables coupled with higher yields on securities
lending activities when compared to 2013.
Trading and investing commissions revenue increased 9% to $456 million for the year ended December 31,
2014 compared to 2013. The increase was primarily due to an increase in DARTs of 12% to 168,474 for the year ended
December 31, 2014, partially offset by a decrease in average commission per trade of 3% to $10.81, compared to
2013.
Trading and investing fees and service charges increased 20% to $199 million for the year ended December
31, 2014 compared to 2013. The increase in fees and services charges was driven primarily by increased order flow
revenue as a result of increased trading volumes and as E*TRADE Securities began routing all of its order flow to
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Table of Contents
third parties following the sale of G1 Execution Services, LLC which was completed on February 10, 2014. In
addition, advisor management fees increased driven by assets in managed accounts within our retirement, investing
and savings products, which were $3.1 billion at December 31, 2014, compared to $2.4 billion at December 31, 2013.
Trading and investing principal transactions decreased 86% to $10 million for the year ended December 31,
2014 compared to 2013. Principal transactions were derived from our market making business in which we acted as a
market-maker for our brokerage customers’ orders as well as orders from third party customers. On February 10, 2014,
we completed the sale of the market making business to an affiliate of Susquehanna International Group, LLP and no
longer generate principal transactions revenue.
Trading and investing operating expense decreased 13% to $766 million for the year ended December 31,
2014 compared to 2013. The decrease for the year ended December 31, 2014 was driven by higher operating expenses
in the prior period as a result of $142 million in impairment of goodwill associated with the market making business,
which was recognized in the second quarter of 2013.
As of December 31, 2014, we had approximately 3.1 million brokerage accounts, 1.3 million stock plan
accounts and 0.4 million banking accounts. For the years ended December 31, 2014 and 2013, our brokerage products
contributed 80% and 78%, respectively, and our banking products contributed 20% and 22%, respectively, of total
trading and investing net revenue.
Balance Sheet Management
The following table summarizes balance sheet management financial information and key financial metrics as
of and for the year ended December 31, 2015, 2014 and 2013 (dollars in millions):
Net operating interest income
Fees and service charges
Gains (losses) on securities and other
Net impairment
Other revenues
Total net revenue
Provision (benefit) for loan losses
Total operating expense
Balance sheet management income (loss)
Key Financial Metrics:
Special mention loan delinquencies
Allowance for loan losses
*
Percentage not meaningful.
Year Ended December 31,
Variance
2015 vs. 2014
2015
2014
2013
Amount
%
$
383
$
455
$
442
$
1
(331)
—
5
58
(40)
105
$
$
$
(7) $
130
353
$
$
1
36
—
6
498
36
148
314
155
404
$
$
$
2
61
(3)
4
506
143
179
184
271
453
$
$
$
(72)
—
(367)
—
(1)
(440)
(76)
(43)
(321)
(25)
(51)
(16)%
— %
*
*
(17)%
(88)%
(211)%
(29)%
*
(16)%
(13)%
The balance sheet management segment primarily generates revenue through net operating interest income.
Net operating interest income is generated from interest earned on investments in securities and the loan portfolio, 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 deposits and customer payables to invest in available-for-
sale and held-to-maturity securities, 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.
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Table of Contents
2015 Compared to 2014
The balance sheet management segment income (loss) was $(7) million for the year ended December 31,
2015 compared to $314 million for the same period in 2014. The segment loss during the year ended December 31,
2015 was primarily driven by the termination of $4.4 billion of legacy wholesale funding obligations during the year.
The balance sheet management net operating interest income decreased 16% to $383 million for the year
ended December 31, 2015, compared to the same period in 2014. The decrease was driven by a decrease of $68
million in the interest earned on the loan portfolio as a result of lower average loan balances due to loan portfolio run-
off, a decrease of $44 million as a result of lower interest earned on the available-for-sale securities portfolio due to
lower yields and an increase of $54 million in interest expense from the deposit transfer pricing arrangement with the
trading and investing segment, partially offset by an increase of $18 million driven by higher interest earned on the
held-to-maturity portfolio due to the growth in average balances as well as a decrease in interest expense of $74
million due to the termination of $4.4 billion of legacy wholesale funding obligations during 2015.
Gains (losses) on securities and other were $(331) million for the year ended December 31, 2015 compared to
$36 million for the same period in 2014. Gains (losses) on securities and other for the year ended December 31, 2015
included the reclassification of $370 million of losses on cash flow hedges from accumulated comprehensive loss into
earnings as a result of the termination of legacy wholesale funding obligations during 2015. Gains (losses) on
securities and other for the year ended December 31, 2014 included a gain of $7 million on the sale of one- to four-
family loans modified as TDRs and a gain of $6 million recognized on the sale of our remaining available-for-sale
non-agency CMOs.
We recognized a benefit for loan losses of $40 million for the year ended December 31, 2015 compared to a
provision of $36 million for the same period in 2014. The benefit for loan losses reflected a decrease in allowance for
loan losses due to continued improvement in economic conditions, recoveries of previous charge-offs and loan
portfolio run-off, offset by an increase in allowance due to enhancements to our modeling practices for the allowance
for loan losses during the year ended December 31, 2015. For additional information on management's estimate of the
allowance for loan losses, refer to Summary of Critical Accounting Policies and Estimates. The timing and magnitude
of the provision (benefit) for loan losses is affected by many factors that could result in variability, particularly as
mortgage loans reach the end of their interest-only period.
Total balance sheet management operating expense decreased 29% to $105 million for the year ended
December 31, 2015, compared to the same period in 2014. The decrease in operating expense resulted primarily from
lower FDIC insurance premiums and reduced servicing expenses due to lower loan balances compared to the same
period in 2014.
2014 Compared to 2013
The balance sheet management segment income increased 71% to $314 million for the year ended December
31, 2014 compared to 2013. The increase in balance sheet management income was primarily due to a decrease in
provision (benefit) for loan losses of 75% to $36 million for the year ended December 31, 2014 compared to 2013.
The balance sheet management net operating interest income increased 3% to $455 million for the year ended
December 31, 2014 compared to 2013. The increase for the year ended December 31, 2014 was driven by the growth
in average balances and increased yields of our securities portfolio, which was partially offset by the decrease in the
interest earned on the loan portfolio.
Gains (losses) on securities and other decreased 41% to $36 million for the year ended December 31, 2014
compared to 2013. Gains (losses) on securities and other for the year ended December 31, 2014 included a $7 million
gain on the sale of one- to four-family loans modified as TDRs and a $6 million gain recognized on the sale of our
remaining available-for-sale non-agency CMOs.
Provision (benefit) for loan losses decreased 75% to $36 million for the year ended December 31, 2014
compared to 2013. The decrease in provision (benefit) for loan losses was driven primarily by improving economic
conditions, as evidenced by the lower levels of delinquent loans in the one- to four-family and home equity loan
portfolios, lower net charge-offs, home price improvement and loan portfolio run-off for the year ended December 31,
2014. The reduction in the provision (benefit) for loan losses was partly offset by enhancements in our quantitative
46
Table of Contents
allowance methodology to include the total probable loss on a subset of identified higher risk home equity lines of
credit. These enhancements drove the majority of the provision for loan losses within the home equity portfolio during
the year ended December 31, 2014.
Total balance sheet management operating expense decreased 17% to $148 million for the year ended
December 31, 2014 compared to 2013. The decrease in operating expense for the year ended December 31, 2014
resulted primarily from lower FDIC insurance premiums and reduced servicing expenses due to lower loan balances,
partially offset by increased expense related to real estate owned when compared to the same period in 2013.
Corporate/Other
The following table summarizes corporate/other financial information for the years ended December 31,
2015, 2014 and 2013 (dollars in millions):
Year Ended December 31,
Variance
2015 vs. 2014
2015
2014
2013
Amount
%
Total net revenue
Compensation and benefits
Professional services
Occupancy and equipment
Communications
Depreciation and amortization
Restructuring and other exit activities
Other operating expenses
Total operating expense
Operating loss
Total other income (expense)
Corporate/other loss
$
1
$
1
$
— $
147
118
52
14
2
18
17
25
275
(274)
(170)
$
(444) $
51
15
2
17
8
20
93
43
8
2
16
28
23
231
(230)
(181)
(411) $
213
(213)
(110)
(323) $
—
29
1
(1)
—
1
9
5
44
(44)
11
(33)
— %
25 %
2 %
(7)%
— %
6 %
113 %
25 %
19 %
19 %
(6)%
8 %
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.
2015 Compared to 2014
The corporate/other loss before income taxes was $444 million for the year ended December 31, 2015
compared to $411 million for the same period in 2014.
The operating loss increased 19% to $274 million for the year ended December 31, 2015 compared to the
same period in 2014. The increase for the year was primarily due to increased salaries expense driven by higher
headcount and increased incentive compensation, compared to the same period in 2014. The increase for the year
ended December 31, 2015 was also driven by $6 million of executive severance costs recorded in compensation and
benefits and $6 million executive severance for an eliminated position recorded in restructuring and other exit
activities.
Total other income (expense) includes losses on early extinguishment of debt of $112 million for the year
ended December 31, 2015 compared to $71 million for the same period in 2014. During 2015, we terminated $4.4
billion of legacy wholesale funding obligations which resulted in a pre-tax charge of $43 million in the losses on early
extinguishment of debt line item. During 2015, we also redeemed $19 million of TRUPs in advance of maturity and
recorded a net gain on early extinguishment of debt of $4 million. In addition, during the years ended December 31,
2015 and 2014 we recorded losses on early extinguishment of debt of $73 million and $59 million, respectively, as a
result of corporate debt refinance transactions. Refer to Note 13—Corporate Debt in Item 8. Financial Statements and
Supplementary Data for additional information on the debt refinance transactions executed during the periods
presented. During the year ended December 31, 2014, we also recorded a $12 million loss on early extinguishment of
debt as a result of the early extinguishment of $100 million in repurchase agreements.
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Table of Contents
Total other income (expense) also includes corporate interest expense of $65 million for year ended
December 31, 2015 compared to $113 million for the same period in 2014. The decrease in corporate interest expense
was driven by corporate debt refinances and corporate debt reductions which have reduced our annual debt service
cost.
2014 Compared to 2013
The corporate/other loss before income taxes was $411 million for the year ended December 31, 2014
compared to $323 million in 2013.
The operating loss increased 8% to $230 million for the year ended December 31, 2014 compared to 2013.
The increase during the year ended December 31, 2014 was primarily due to increased compensation and benefits,
professional services, and occupancy and equipment partially offset by lower restructuring and other exit activities.
The increase in compensation and benefits for the year ended December 31, 2014 resulted primarily from increased
salaries expense driven by higher headcount. Restructuring and other exit activities were $8 million for the year ended
December 31, 2014 compared to $28 million for 2013. The expenses in 2014 were driven by severance costs incurred
primarily related to our exit of the market making business, and were partially offset by the $4 million gain on the sale
of that business, which was completed during 2014. The expenses in 2013 were driven primarily by severance costs
incurred as part of the expense reduction initiatives in the prior periods.
Total other income (expense) primarily consisted of corporate interest expense of $113 million for year ended
December 31, 2014, compared to $114 million in 2013. In addition, during the year ended December 31, 2014 we
recognized $12 million of losses on early extinguishment of debt as a result of the early extinguishment of $100
million in repurchase agreements, and $59 million of losses on early extinguishment of debt as a result of the
redemption of all of the outstanding 6 3/4% Notes and 6% Notes, a total of $940 million in aggregate principal amount.
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Table of Contents
BALANCE SHEET OVERVIEW
The following table sets forth the significant components of the consolidated balance sheet (dollars in
millions):
Assets:
December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
Cash and equivalents
$
2,233
$
1,783
$
Segregated cash
Securities(1)
Receivables from brokers, dealers and clearing
organizations
Margin receivables
Loans receivable, net
Deferred tax assets, net
Other(2)
Total assets
Liabilities and shareholders’ equity:
Deposits
Payables to brokers, dealers and clearing
organizations
$
$
Customer payables
Other borrowings
Corporate debt
Other liabilities
Total liabilities
Shareholders’ equity
1,057
25,602
520
7,398
4,613
1,033
2,971
45,427
29,445
1,576
6,544
491
997
575
39,628
5,799
$
$
555
24,636
884
7,675
5,979
951
3,067
45,530
24,890
1,699
6,455
4,971
1,366
774
40,155
5,375
$
$
$
Total liabilities and shareholders’ equity
$
45,427
$
45,530
$
450
502
966
(364)
(277)
(1,366)
82
(96)
(103)
4,555
(123)
89
(4,480)
(369)
(199)
(527)
424
(103)
25 %
90 %
4 %
(41)%
(4)%
(23)%
9 %
(3)%
— %
18 %
(7)%
1 %
(90)%
(27)%
(26)%
(1)%
8 %
— %
(1)
(2)
Includes balance sheet line items available-for-sale and held-to-maturity securities.
Includes balance sheet line items property and equipment, net, goodwill, other intangibles, net and other assets.
Cash and Equivalents
Cash and equivalents increased by 25% to $2.2 billion during the year ended December 31, 2015. The
increase in our cash and equivalents was largely driven by the reinvestment timing for customer assets held at third
party institutions that were transferred back onto our balance sheet. The increase was partially offset by the use of cash
to refinance and redeem corporate debt, terminate our legacy wholesale funding obligations and repurchase common
shares.
Segregated Cash
Segregated cash increased by 90% to $1.1 billion during the year ended December 31, 2015. 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.
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Table of Contents
Securities
Available-for-sale and held-to-maturity securities are summarized as follows (dollars in millions):
December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities and CMOs
$
11,763
$
11,164
$
Other debt securities
Total debt securities
Publicly traded equity securities(1)
Total available-for-sale securities
Held-to-maturity securities:
Agency mortgage-backed securities and CMOs
Other debt securities
Total held-to-maturity securities
Total investments in securities
794
12,557
32
12,589
10,353
2,660
13,013
25,602
$
$
$
$
1,191
12,355
33
12,388
9,793
2,455
12,248
24,636
$
$
$
$
$
$
$
$
599
(397)
202
(1)
201
560
205
765
966
5 %
(33)%
2 %
(3)%
2 %
6 %
8 %
6 %
4 %
(1) Publicly traded equity securities consisted of investments in a mutual fund related to the Community Reinvestment Act.
Securities represented 56% and 54% of total assets at December 31, 2015 and 2014, respectively. We classify
debt securities as available-for-sale or held-to-maturity based on our investment strategy and management’s
assessment of our intent and ability to hold the debt securities until maturity. The increase in total investments in
securities during the year ended December 31, 2015 was primarily due to net purchases of held-to-maturity and
available-for-sale agency mortgage-backed securities, partially offset by the sale of $2.3 billion of available-for-sale
securities to fund the termination of legacy wholesale funding obligations.
Loans Receivable, Net
Loans receivable, net are summarized as follows (dollars in millions):
December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
One- to four-family
Home equity
Consumer and other
Total loans receivable
Unamortized premiums, net
Allowance for loan losses
Total loans receivable, net
$
$
2,488
$
3,060
$
2,114
341
4,943
23
(353)
4,613
$
2,834
455
6,349
34
(404)
5,979
$
(572)
(720)
(114)
(1,406)
(11)
51
(1,366)
(19)%
(25)%
(25)%
(22)%
(32)%
(13)%
(23)%
Loans receivable, net decreased 23% to $4.6 billion at December 31, 2015 from $6.0 billion at December 31,
2014. We are continuing our strategy of reducing balance sheet risk through loan portfolio run-off, which we plan to
do for the foreseeable future. Loan portfolio run-off is impacted by a variety of factors. As our portfolio ages and we
gather substantive performance history for loans converting from interest-only to amortizing, we will continue to
assess the economic environment and the value of our portfolio in the marketplace. While it is our intention to
continue to hold these loans, if the markets improve our strategy could change. For additional information on
management's estimate of the allowance for loan losses, see Summary of Critical Accounting Policies and Estimates.
50
Table of Contents
Deposits
Deposits are summarized as follows (dollars in millions):
December 31,
Variance
2015 vs. 2014
2015
2014
Amount
Sweep deposits
Complete savings deposits
Checking deposits
Other money market and savings deposits
Time deposits
Total deposits
$
$
24,018
$
19,119
$
3,357
1,239
792
39
3,753
1,137
833
48
29,445
$
24,890
$
4,899
(396)
102
(41)
(9)
4,555
%
26 %
(11)%
9 %
(5)%
(19)%
18 %
Deposits represented 74% and 62% of total liabilities at December 31, 2015 and 2014, respectively. At
December 31, 2015, 88% of our customer deposits were covered by FDIC insurance. Deposits provide the benefit of
lower interest costs compared with wholesale funding alternatives.
The majority of the deposits balance, specifically sweep deposits, is included in brokerage related cash and
reported as a customer activity metric of $41.7 billion and $41.1 billion at December 31, 2015 and 2014, respectively.
The total brokerage related cash balance is summarized as follows (dollars in millions):
Sweep deposits(1)(2)
Customer payables
Subtotal
Customer assets held by third parties(3)
Total brokerage related cash
December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
$
$
24,018
$
19,119
$
6,544
30,562
11,173
6,455
25,574
15,520
41,735
$
41,094
$
4,899
89
4,988
(4,347)
641
26 %
1 %
20 %
(28)%
2 %
(1) Sweep deposits are held at banking subsidiaries and are included in the deposits line item on our consolidated balance sheet.
(2) 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.
(3) Customer assets held by third parties are not reflected on our consolidated balance sheet and are not immediately available for liquidity
purposes.
We have an extended insurance sweep deposit account program ("ESDA") for brokerage customers. The ESDA
program utilizes E*TRADE Bank, in combination with additional third party program banks, to allow certain customers
the ability to insure cash they hold in the ESDA program up to $1,250,000 for each category of legal ownership. During
the first quarter of 2015, we converted customer assets already in the ESDA program to a new sweep deposit platform.
This new platform enables us to more efficiently manage our balance sheet size by giving us the capability to direct
customer assets on- or off- balance sheet as needed. Customer assets held by third parties are maintained at third party
financial institutions. The components of customer assets held by third parties are as follows (dollars in millions):
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Money market fund
Sweep deposits at unaffiliated financial institutions
Subtotal
Municipal funds and other
Customer assets held by third parties(1)
December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
$
$
1,756
$
7,169
$
5,818
7,574
3,599
4,744
11,913
3,607
11,173
$
15,520
$
(5,413)
1,074
(4,339)
(8)
(4,347)
(76)%
23 %
(36)%
*
(28)%
* Percentage not meaningful.
(1) Approximately 60% of these off-balance sheet assets resulted from our deleveraging efforts that we completed in prior periods. We
maintain the ability to transfer the majority of these customer assets to our balance sheet with notification to the third party financial
institutions and customer consent, as appropriate.
During the year ended December 31, 2015, we transferred a net total of $4.7 billion of customer assets held at
third party institutions back onto our balance sheet. This amount included $2.4 billion that moved on balance sheet upon
converting customer assets from the money market fund product held by third parties to the new sweep deposits platform.
An additional $3.2 billion of customer assets held off balance sheet in money market fund products converted to sweep
deposits held at unaffiliated financial institutions via the new sweep deposits ESDA platform during the year ended
December 31, 2015.
Other Borrowings
Other borrowings, which includes securities sold under agreements to repurchase, FHLB advances and
TRUPs, are summarized as follows (dollars in millions):
Trust preferred securities
Securities sold under agreements to repurchase and FHLB
advances:
Repurchase agreements
FHLB advances
Fair value hedge adjustments and deferred costs
December 31,
Variance
2015 vs. 2014
2015
2014
Amount
%
$
409
$
428
$
(19)
(4)%
82
—
—
3,672
920
(49)
(3,590)
(920)
49
(98)%
(100)%
(100)%
Total securities sold under agreements to repurchase
and FHLB advances
Total other borrowings
82
491
$
4,543
4,971
$
(4,461)
(4,480)
(98)%
(90)%
$
Other borrowings represented 1% and 12% of total liabilities at December 31, 2015 and 2014, respectively. The
decrease is primarily due to the termination of $4.4 billion of repurchase agreements and FHLB advances during 2015.
We expect the termination of these legacy wholesale funding obligations to significantly reduce our funding costs, thereby
improving our ability to generate net income.
We also repurchased $19 million of TRUPs in advance of maturity during 2015 and recorded a net gain on
early extinguishment of debt of $4 million.
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Corporate Debt
Corporate debt by type is shown as follows (dollars in millions):
December 31, 2015
Interest-bearing notes:
5 3/8% Notes, due 2022
4 5/8% Notes, due 2023
Total interest-bearing notes
Non-interest-bearing debt:
0% Convertible debentures, due 2019
Total corporate debt
December 31, 2014
Interest-bearing notes:
6 3/8% Notes, due 2019
5 3/8% Notes, due 2022
Total interest-bearing notes
Non-interest-bearing debt:
0% Convertible debentures, due 2019
Total corporate debt
Face Value
Discount
Net
540
$
460
1,000
8
1,008
$
(6) $
(5)
(11)
—
(11) $
Face Value
Discount
Net
$
800
540
1,340
38
1,378
$
(5) $
(7)
(12)
—
(12) $
534
455
989
8
997
795
533
1,328
38
1,366
$
$
$
$
During the first quarter of 2015, we issued an aggregate principal amount of $460 million in 4 5/8% Notes. We
used the net proceeds from the issuance of the 4 5/8% Notes, along with $432 million of existing corporate cash, to
redeem all of the outstanding 6 3/8% Notes.
During the years ended December 31, 2015 and 2014, $30 million and $5 million of the Company’s
convertible debentures were converted into 2.9 million and 0.5 million shares of common stock, respectively.
Shareholders’ Equity
The activity in shareholders’ equity during the year ended December 31, 2015 is summarized as follows
(dollars in millions):
Common Stock /
Additional Paid-In
Capital
Beginning balance, December 31, 2014
Net income
Net change from available-for-sale securities
Net change from cash flow hedging instruments
Other(1)
Ending balance, December 31, 2015
$
$
7,353
—
—
—
6
7,359
$
Accumulated Deficit /
Other
Comprehensive Loss
$
(1,978) $
268
(108)
261
(3)
(1,560) $
Total
5,375
268
(108)
261
3
5,799
(1) Other includes employee share-based compensation, conversions of convertible debentures, repurchase of common stock and changes in
accumulated other comprehensive loss from foreign currency translation.
The decrease in accumulated other comprehensive loss was primarily due to the reclassification of deferred
losses on cash flow hedges into net income as a result of the termination of our legacy wholesale funding obligations
in September 2015.
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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. We believe liquidity is of critical
importance to the Company and especially important within E*TRADE Bank and our broker-dealer subsidiaries. The
objective of our policies is to ensure that we can meet our corporate, banking and broker-dealer liquidity needs under
both normal operating conditions and under periods of stress in the financial markets.
Liquidity
Our corporate liquidity needs are primarily driven by capital needs at E*TRADE Bank and E*TRADE
Clearing as well as by the amount of principal and interest due on our corporate debt. Our banking and brokerage
subsidiaries' liquidity needs are driven primarily by the level and volatility of our customer activity. Management
maintains a 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 are the key sources of liquidity that impact our ability to meet our
liquidity needs: corporate cash, bank cash, deposits, securities lending, customer payables, unused FHLB borrowing
capacity, E*TRADE Clearing's liquidity lines and the revolving credit facility at the parent company. 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.
Corporate Cash
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, not including bank and broker-dealer
subsidiaries, that can distribute cash to the parent company without any regulatory approval or notification. We believe
corporate cash, which is a non-GAAP measure, 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, share repurchases, debt service costs and other overhead cost sharing arrangements. E*TRADE Bank and
its subsidiaries require regulatory approval prior to the payment of dividends to the parent company. As E*TRADE
Securities and E*TRADE Clearing are no longer subsidiaries of E*TRADE Bank, they can pay dividends to the parent
company with proper regulatory notifications. Additionally, the parent company had $739 million in net deferred tax
assets at December 31, 2015, which will ultimately become sources of corporate cash as the parent company’s
subsidiaries reimburse the parent company for the use of its deferred tax assets. The following table provides a
reconciliation of the consolidated cash and equivalents line item to corporate cash (dollars in millions):
Consolidated cash and equivalents
Less: Bank cash(1)
Less: U.S. broker-dealers' cash(1)
Less: Other cash
Corporate cash
December 31,
2015
2014
2013
$
$
2,233
$
1,783
$
(1,264)
(497)
(25)
447
$
(1,523)
N/A
(27)
233
$
1,838
(1,402)
N/A
(21)
415
(1) U.S. broker-dealers' cash includes E*TRADE Securities and E*TRADE Clearing. E*TRADE Securities and E*TRADE Clearing were
moved out from under E*TRADE Bank effective February 1, 2015 and July 1, 2015, respectively. Bank cash included $764 million and
$507 million of cash held by U.S. broker-dealers at December 31, 2014 and December 31, 2013, respectively.
Corporate cash ended 2015 at $447 million, up from $233 million at December 31, 2014. Corporate cash
included dividends of $281 million from E*TRADE Bank and $565 million from E*TRADE Securities to the parent
company during the year ended December 31, 2015.
During 2015, we used $432 million of corporate cash along with the net proceeds from the issuance of $460
million of corporate debt to redeem $800 million in aggregate principal amount of our higher cost corporate debt. This
transaction decreased our annual debt service costs from $80 million at December 31, 2014 to $50 million at
December 31, 2015 and reduced our total corporate debt to $1.0 billion at December 31, 2015. We maintain corporate
54
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cash at a minimum of two times our scheduled annual corporate debt service payments and scheduled maturities over
the next 12 months. As such, our current minimum is approximately $100 million as we do not have any corporate
debt with scheduled maturities in the next 12 months.
In November 2015, our Board of Directors authorized the repurchase of up to $800 million of our common
shares which may be effected through March 31, 2017 at prices which we deem to be appropriate, subject to market
conditions. The timing and exact amount of any common stock repurchases will depend on various factors, including
market conditions and our capital position. We used corporate cash to repurchase a total of $50 million or 1.7 million
shares of common stock during the year ended December 31, 2015.
Revolving Credit Facility
At December 31, 2015, we have a senior secured revolving credit facility at the parent company with an
available line of credit of $250 million. The revolving credit facility enhances our ability to meet liquidity needs at the
parent company, as we have the ability to borrow against this facility for working capital and general corporate
purposes. Our revolving credit facility contains certain covenants, including the requirement for the parent company to
maintain unrestricted cash of at least $100 million. At December 31, 2015, there was no outstanding balance under this
revolving credit facility.
E*TRADE Bank Liquidity
E*TRADE Bank relies on bank cash and deposits for liquidity needs. Management believes that within
deposits, sweep deposits are of particular importance as they are a stable source of liquidity for E*TRADE Bank. We
have the ability to generate liquidity in the form of additional deposits by raising the yield on our customer deposit
products and by bringing additional deposits on balance sheet.
While we previously transferred customer sweep deposits to third party financial institutions as a result of
deleveraging initiatives, we maintain the ability to transfer the majority of these off-balance sheet customer assets to
E*TRADE Bank's balance sheet and began doing so during 2015 using our new sweep deposit platform. This new
platform enables us to more efficiently manage our balance sheet size by giving us the capability to direct customer
assets on- or off- balance sheet as needed. During the year ended December 31, 2015, we transferred a net total of $4.7
billion of customer assets held at third party institutions back onto our balance sheet. We intend to continue
transferring customer deposits held by third parties to our balance sheet and expect to reach our targeted consolidated
balance sheet size in the second quarter of 2016.
Historically, E*TRADE Bank also relied on wholesale funding sources for liquidity purposes. In September
2015, we terminated $4.4 billion of our legacy wholesale funding obligations at E*TRADE Bank. In connection with
the termination of the legacy wholesale funding obligations, the parent company contributed $110 million of corporate
cash to E*TRADE Bank in order to maintain targeted capital levels. We may continue utilizing wholesale funding
sources for short-term liquidity and contingency funding requirements. 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, 2015, E*TRADE Bank had approximately $3.2 billion and $0.9 billion in
additional collateralized borrowing capacity with the FHLB and the Federal Reserve Bank, respectively.
E*TRADE Clearing Liquidity
E*TRADE Clearing relies on customer payables, securities lending, and internal and external lines of credit
to provide liquidity and finance margin lending. E*TRADE Clearing maintains secured committed lines of credit with
two unaffiliated banks, aggregating to $175 million at December 31, 2015. E*TRADE Clearing also has secured
uncommitted lines of credit with several unaffiliated banks aggregating to $375 million and unsecured uncommitted
lines of credit with two unaffiliated banks aggregating to $100 million at December 31, 2015. During 2015, E*TRADE
Clearing entered into a 364-day, $345 million senior unsecured revolving credit facility with a syndicate of banks,
which brought its total external liquidity lines to $995 million. The credit facility contains certain covenants including
maintenance covenants related to E*TRADE Clearing's minimum consolidated tangible net worth and regulatory net
capital ratio. There were no outstanding balances for any of these lines at December 31, 2015. E*TRADE Clearing
also maintains lines of credit with the parent company and E*TRADE Bank.
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Capital Resources
Executing on our capital plan remains a priority for us. We submitted an initial capital plan to the OCC and
Federal Reserve in 2012 and have subsequently updated the plan annually. The plan includes 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. We believe we have made important progress since we laid out our
capital plan, as evidenced by:
•
•
•
$756 million in quarterly dividends that our regulators approved from E*TRADE Bank since 2013, including
$281 million during the year ended December 31, 2015;
regulatory approval to operate E*TRADE Bank at a 9.0% Tier 1 leverage ratio during 2015 and at an 8.0%
ratio effective 2016; and
the decline in FDIC insurance premiums.
We also received regulatory approval to move our broker-dealers, E*TRADE Securities and E*TRADE
Clearing, out from under E*TRADE Bank. E*TRADE Securities was moved out in February 2015 and subsequently
paid dividends totaling $565 million to the parent company and E*TRADE Clearing was moved out in July 2015, after
bolstering its standalone capital and liquidity levels. The revised organizational structure provides increased capital
flexibility as it enables us to dividend excess regulatory capital at our broker-dealers to the parent company with
proper regulatory notifications.
We did not seek a dividend from E*TRADE Bank during the fourth quarter of 2015, but intend to resume
requesting regulatory approval in the first quarter of 2016 to issue a dividend each quarter equivalent to E*TRADE
Bank's net income from the previous quarter. In addition, in the first quarter of 2016, with approval to operate at a
reduced Tier 1 leverage ratio of 8%, we intend to request a dividend in excess of E*TRADE Bank’s fourth quarter
2015 net income.
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Table of Contents
Bank Capital Requirements
The Company and E*TRADE Bank are subject to banking regulatory capital requirements. Refer to the
Regulation section in Item 1. Business for information regarding the capital requirements administered by federal
banking agencies. At December 31, 2015, our regulatory capital ratios for E*TRADE Bank were well above the
minimum ratios required to be "well capitalized." E*TRADE Bank's capital ratios are calculated as follows (dollars in
millions):
E*TRADE Bank shareholders’ equity(2)
Add:
Losses in other comprehensive income on available-for-sale debt securities and
cash flow hedges, net of tax
Deduct:
Goodwill and other intangible assets, net of deferred tax liabilities
Disallowed deferred tax assets
E*TRADE Bank Tier 1 capital/Common Equity Tier 1 capital(2)(3)
Add:
Allowable allowance for loan losses
E*TRADE Bank total capital(2)
E*TRADE Bank average/total assets(2)(4)
Deduct:
Disallowed deferred tax assets
Goodwill and other intangible assets, net of deferred tax liabilities
Other
E*TRADE Bank adjusted average/total assets for leverage capital purposes(1)
E*TRADE Bank total risk-weighted assets(2)(5)
E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Adjusted average assets for
leverage capital purposes)(2)(4)
E*TRADE Bank Tier 1 capital / Total risk-weighted assets(2)
E*TRADE Bank total capital / Total risk-weighted assets(2)
E*TRADE Bank Common Equity Tier 1 capital(3) / Total risk-weighted assets(2)
2015(1)
December 31,
2014(1)
2013(1)
$
3,181
$
6,102
$
5,741
101
(38)
(169)
3,075
110
3,185
31,785
(169)
(38)
—
31,578
8,424
9.7%
36.5%
37.8%
36.5%
$
$
$
$
255
459
(1,467)
(342)
4,548
224
4,772
44,672
(342)
(1,467)
13
42,876
17,717
10.6%
25.7%
26.9%
N/A
$
$
$
$
(1,529)
(566)
4,105
226
4,331
45,085
(566)
(1,529)
167
43,157
17,858
9.5%
23.0%
24.3%
N/A
$
$
$
$
(1) Due to the change in regulatory requirements described above, the 2015 ratios were calculated under Basel III requirements and the 2014
and 2013 ratios were calculated under Basel I requirements.
(2) Amounts presented for E*TRADE Bank in 2015 exclude E*TRADE Securities as of February 1, 2015, and E*TRADE Clearing as of July
1, 2015, the dates the subsidiaries were moved out from under E*TRADE Bank, respectively.
(3) Common Equity Tier 1 capital under Basel III replaced Tier 1 common capital. Prior to Basel III becoming effective, E*TRADE Bank’s
Tier 1 common ratio was a non-GAAP measure that management believes is an important measure of capital strength. E*TRADE Bank's
Tier 1 common ratio was 25.7% and 23.0% as of December 31, 2014 and December 31, 2013, respectively.
(4) As of December 31, 2015, E*TRADE Bank’s Tier 1 Leverage ratio was calculated using average total assets. Prior to Basel III becoming
effective for E*TRADE Bank, E*TRADE Bank’s Tier 1 Leverage ratio was calculated using end of period total assets.
(5) 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. Due to the change in
regulatory requirements described above, in 2015 the vast majority of our margin receivables qualified for 0% risk-weighting.
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At December 31, 2015, our regulatory capital ratios for E*TRADE Financial were well above the minimum
ratios required to be "well capitalized." E*TRADE Financial's capital ratios are calculated as follows (dollars in
millions):
E*TRADE Financial shareholders’ equity
$
5,799
$
5,375
$
4,856
Add:
Losses in other comprehensive income on available-for-sale debt securities
and cash flow hedges, net of tax
101
255
459
2015(1)
December 31,
2014(1)
2013(1)
Deduct:
Goodwill and other intangible assets, net of deferred tax liabilities
Disallowed deferred tax assets
Other(2)
E*TRADE Financial Common Equity Tier 1 capital(3)
Add:
Qualifying restricted core capital elements (trust preferred securities)(2)
E*TRADE Financial Tier 1 capital
Add:
Allowable allowance for loan losses
Non-qualifying capital instruments subject to phase-out (trust preferred
securities)(2)
E*TRADE Financial total capital
E*TRADE Financial average total assets
Deduct:
Goodwill and other intangible assets, net of deferred tax liabilities
Disallowed deferred tax assets
Other(2)
E*TRADE Financial adjusted average total assets for leverage capital purposes
E*TRADE Financial total risk-weighted assets(4)
$
$
$
$
E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Adjusted average total
assets for leverage capital purposes)
E*TRADE Financial Tier 1 capital / Total risk-weighted assets
E*TRADE Financial total capital / Total risk-weighted assets
E*TRADE Financial Common Equity Tier 1 capital(3) / Total risk-weighted assets
(1,419)
(838)
104
3,747
—
3,747
129
310
4,186
44,016
(1,419)
(839)
104
41,862
9,536
9.0%
39.3%
43.9%
39.3%
$
$
$
$
(1,592)
(1,008)
—
3,030
433
3,463
223
—
3,686
45,445
(1,592)
(1,008)
—
42,845
17,683
8.1%
19.6%
20.8%
N/A
$
$
$
$
(1,654)
(1,185)
—
2,476
433
2,909
228
—
3,137
46,038
(1,654)
(1,185)
—
43,199
17,992
6.7%
16.2%
17.4%
N/A
(1) Due to the change in regulatory requirements described above, the 2015 ratios were calculated under Basel III requirements. The 2014 and
2013 capital ratios were non-GAAP measures as the parent company was not yet held to regulatory capital requirements and were
calculated based on the Federal Reserve’s well-capitalized requirements then applicable to bank holding companies. Management believes
the non-GAAP ratios are an important measure of the Company's capital strength and managed capital against ratios then applicable to bank
holding companies in preparation for the application of these requirements.
(2) As a result of applying the transition provisions under Basel III, the Company included 25% of the TRUPs in the calculation of E*TRADE
Financial’s Tier 1 capital and 75% of the TRUPs in the calculation of E*TRADE Financial’s total capital. Prior to Basel III becoming
effective for E*TRADE Financial, the Company included 100% of the TRUPs in E*TRADE Financial’s Tier 1 capital due to the regulatory
agencies’ delay in the implementation of the TRUPs phase-out until January 1, 2015.
(3) Common Equity Tier 1 capital under Basel III replaced Tier 1 common capital. E*TRADE Financial's Tier 1 common ratio was 17.1% and
13.8% as of December 31, 2014 and December 31, 2013, respectively.
(4) 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. Due to the change in
regulatory requirements described above, in 2015 the vast majority of our margin receivables qualified for 0% risk-weighting.
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Broker-Dealer Capital Requirements
Our broker-dealer subsidiaries are subject to capital requirements determined by their respective regulators.
At December 31, 2015, all of our brokerage subsidiaries met their minimum net capital requirements, ending the
period with excess net capital of $909 million.
E*TRADE Clearing was moved out from under E*TRADE Bank in July 2015. Prior to this move, E*TRADE
Bank contributed $150 million of capital to E*TRADE Clearing in June 2015. Excess net capital at E*TRADE
Clearing is $846 million, at December 31, 2015.
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. 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 Item 8.
Financial Statements and Supplementary Data.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at December 31, 2015 and the effect such
obligations are expected to have on our liquidity and cash flow in future periods (dollars in millions):
Payments Due by Period
Less Than 1
Year
1-3 Years
3-5 Years
Thereafter Other (7)
Total
Securities sold under agreements to repurchase(1)
Trust preferred securities(1)(2)
Corporate debt(3)
Uncertain tax positions
Certificates of deposit and brokered certificates
of deposit(1)(4)
Leases(5)
Purchase obligations(6)
82
13
50
4
28
26
82
—
25
101
10
8
51
19
—
25
108
3
3
39
5
—
586
1,112
—
—
36
—
Total contractual obligations
$
285
$
214
$
183
$
1,734
$
—
—
—
12
—
—
—
12
82
649
1,371
29
39
152
106
$ 2,428
(1)
Includes annual interest based on the contractual features of each transaction, using market rates at December 31, 2015. Interest rates are
assumed to remain at current levels over the life of all adjustable rate instruments.
(2) For subordinated debentures, does not assume early redemption under current conversion provisions.
(3)
(4) Does not include sweep deposits, complete savings deposits, other money market and savings deposits or checking deposits as there are no
Includes annual interest payments. Does not assume conversion for the non-interest bearing convertible debentures due 2019.
(5)
(6)
stated maturity dates and /or scheduled contractual payments.
Includes future minimum lease payments, net of sublease proceeds under sale-leaseback transaction and operating leases with initial or
remaining terms in excess of one year.
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.
(7) Represents uncertain tax positions that we are unable to make a reasonably reliable estimate of the timing of cash payments in individual
years or where a net operating loss carryforward could be used to offset the liability.
At December 31, 2015, the Company had approximately $70 million of unused lines of credit available to
customers under home equity lines of credit. The Company also had $54 million in commitments to fund small
business investment companies, community development financial institutions, affordable housing tax credit
partnerships and other limited partnerships at December 31, 2015. 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.
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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 keys 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. As of July 1,
2015, our risk management framework became subject to the risk committee requirement for publicly traded bank
holding companies with total consolidated assets of greater than $10 billion and less than $50 billion, contained in the
Federal Reserve’s enhanced prudential standards for bank holding companies and foreign banking organizations. Our
framework, as described below, is in compliance with all applicable requirements.
We have a Board-approved Enterprise Risk Appetite Statement ("RAS") which we disseminate to all
employees. The RAS 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 nine major categories of risk:
•
•
•
•
•
•
•
•
•
Credit Risk—the risk of loss arising from the failure of a borrower or counterparty to meet its credit
obligations.
Interest Rate Risk—the risk of adverse changes in earnings or market value arising from our balance
sheet positions due to changes in interest rates. This includes convexity risk, which arises primarily
from the mortgage holders' option to prepay their mortgages and deposit holders' option to withdraw
their deposits. Spread volatility is an additional risk as the change in spread between mortgages and
swaps or mortgages and treasury securities will affect the value of our investment portfolio.
Liquidity Risk—the potential inability to meet in a timely and cost-effective manner 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 conditions.
Operational Risk—the risk of loss due to failure of people, processes, and systems, or damage to
physical assets; this is one of the most significant risks inherent in our business model.
Information Technology ("IT") and Cybersecurity Risk—the risk of loss of customer or company
data, integrity, or availability of systems through the compromise of our electronic digital media
(e.g., computers, mobile devices, etc.).
Strategic Risk—the risk of loss of market size, market share or margin in any business, leading to
lost revenues and potentially significant reductions to net income.
Reputational Risk—the potential that negative perceptions regarding our conduct or business
practices or capacity to conduct business will adversely affect valuation, profitability, operations or
the 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 nonconformance with, laws, rules, regulations, prescribed practices,
internal policies, and procedures, or ethical standards. Legal, Regulatory, and Compliance risk also
arises 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, as well as
reputational damage. Legal, Regulatory, and Compliance risk can lead to diminished reputation,
reduced franchise value, limited business opportunities, reduced expansion potential, and an inability
to enforce contracts.
We have identified several 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 of risk committees, which consist of members of senior
management, 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.
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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 certain risk committees and the Board of Directors on at least an
annual basis.
The Risk Oversight Committee, which consists of independent 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 throughout the Company aid in the identification, measurement and management of risks, including but
not limited to:
•
•
•
•
•
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 our 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.
Margin Risk Committee—the Margin Risk Committee has responsibility for identifying, monitoring
and mitigating, where necessary, risks arising from margin lending activities, including the
associated credit risk.
Operational Risk and Control Committee—the Operational Risk and Control Committee ("ORCC")
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 ORCC has oversight of operational risk management in the existing enterprise risk
categories, including: transactions execution risk, cybersecurity and other security risks, 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, and we are continuing our strategy of reducing balance sheet risk through loan portfolio run-
off.
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 agreements and derivatives portfolios, as well as the settlement of
trades.
Credit risk is monitored by our Credit Committee and Margin Risk Committee. The Credit Committee's
objective is to evaluate current and expected credit performance of our loans, investments, borrowers and
counterparties relative to market conditions and the probable impact on our financial performance. They establish
credit risk guidelines in accordance with our 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 us. The Margin
Risk Committee is responsible for reviewing and approving margin risk limits and for monitoring adherence to the
established margin risk limits.
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Loss Mitigation on the Loan Portfolio
Our credit risk operations team 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 reduced our exposure to open home equity lines from
a high of over $7 billion in 2007 to approximately $70 million at December 31, 2015.
We have loan modification programs that focus on the mitigation of potential losses in the one- to four-
family and home equity mortgage loan portfolio by targeting borrowers experiencing financial difficulties. During the
years ended December 31, 2015 and 2014, we modified $14 million and $20 million of one- to four-family loans,
respectively, and $15 million and $15 million of home equity loans, respectively, under these programs in which the
modifications were considered TDRs. We have also begun offering a loan modification program to a subset of
borrowers with home equity lines of credit whose original loan terms provided the borrowers the option to accelerate
their date of conversion to amortizing loans. As certain terms of our offer represented economic concessions, such as
longer amortization periods than were in the original loan agreements, this program resulted in $14 million of TDRs
and $44 million of modifications not classified as TDRs during the first quarter of 2015. Loan modification volume
may increase in future periods to mitigate potential losses as the volume of mortgage loans reaching the end of their
interest-only period increases.
We also process minor modifications on a number of loans through traditional collections actions taken in the
normal course of servicing delinquent accounts. Minor modifications resulting in an insignificant delay in the timing
of payments are not considered economic concessions and therefore are not classified as TDRs. At December 31, 2015
and 2014, we had $20 million and $25 million, respectively, of mortgage loans with these other minor modifications
that were not considered TDRs. Approximately 10% and 5% of these loans were classified as nonperforming at
December 31, 2015 and 2014, respectively. We currently do not have any active loan modification program for
consumer and other loans.
Currently, our entire loans receivable portfolio is serviced by other companies. To reduce vendor, operational
and regulatory risks, we have assessed our servicing relationships and, where appropriate, consolidated loan servicing
or transferred certain mortgage loans to servicers that specialize in managing troubled assets. During the year ended
December 31, 2015, we completed servicer transfers of $1.1 billion of mortgage loans as a result of this initiative. At
December 31, 2015, $3.1 billion gross unpaid principal balance of our mortgage loans were held at 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 compared to the expected credit performance of these same loans if they had not
been transferred.
We continue to review the mortgage loan portfolio in order to identify loans to be repurchased by the
originator; however, we consider this effort to be substantially complete. Our review has 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
years ended December 31, 2015 and 2014, we received one-time payments of $2 million and $11 million, respectively,
from certain third party mortgage originators to satisfy in full all pending and future repurchase requests with them.
We recognized these settlements as recoveries to the allowance for loan losses, resulting in a corresponding reduction
to net charge-offs as well as our provision (benefit) for loan losses. Approximately $4 million of loans were
repurchased by or settled with the original sellers during the year ended December 31, 2015, for a total of $461 million
of loans that were repurchased, 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.
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Liquidity Risk Management
Liquidity risk is monitored by various risk committees, including the ALCO and the Board's Risk Oversight
Committee. 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 risk is the risk that asset values or income streams will be adversely affected by changes in market
conditions. Market risk is monitored by various risk committees, including the ALCO and the Board's Risk Oversight
Committee. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk for additional information about
our market risks.
Operational Risk Management
Operational risks are reviewed, challenged and monitored by various risk committees, including the ORCC
and the Board's Risk Oversight Committee. 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 Third Party Oversight 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.
IT and Cybersecurity Risk Management
IT and cybersecurity risks are reviewed, challenged and monitored by various risk committees, including the
ORCC and the Board's Risk Oversight Committee. These risks include potential:
•
•
•
•
cyber-attacks on financial systems that directly or indirectly impact E*TRADE operations and
customers;
compromised systems from inappropriate use by colleagues or customers;
reduced availability or loss of customer facing systems due to a cyber-incident, such as a Distributed
Denial of Service (DDoS) attack; and
system vulnerabilities resulting in a risk of a loss of customer data or data integrity.
Strategic Risk Management
Strategic risks are reviewed, challenged and monitored by various risk committees, including the ERMC and
the Board's Risk Oversight Committee. 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
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.
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Reputational Risk Management
Reputational risks are reviewed, challenged and monitored by various risk committees, including the ERMC
and the Board's Risk Oversight Committee. 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;
failure of third party vendors to adequately meet their responsibilities;
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,
including the ERMC and the Board's Risk Oversight Committee. 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.
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CONCENTRATIONS OF CREDIT RISK
Loans
One- to four-family loans include interest-only loans for a five to ten year period, followed by an amortizing
period ranging from 20 to 25 years. At December 31, 2015, 39% of our one- to four-family portfolio were not yet
amortizing. However, during the year ended December 31, 2015, approximately 15% of these borrowers made
voluntary annual principal payments of at least $2,500 and over a third of those borrowers made voluntary annual
principal payments of at least $10,000.
The home equity loan portfolio is primarily second lien loans on residential real estate properties, which have
a higher level of credit risk than first lien mortgage loans. Approximately 13% of the home equity loan portfolio was in
the first lien position and we held both the first and second lien positions in less than 1% of the home equity loan
portfolio at December 31, 2015. The home equity loan portfolio consisted of approximately 18% of home equity
installment loans and approximately 82% of home equity lines of credit at December 31, 2015.
Home equity installment loans are primarily fixed rate and fixed term, fully amortizing loans that do not offer
the option of an interest-only payment. The majority of home equity lines of credit convert to amortizing loans at the
end of the draw period, which typically ranges from five to ten years. Approximately 4% of this portfolio will require
the borrowers to repay the loan in full at the end of the draw period, commonly referred to as "balloon loans." At
December 31, 2015, 61% of the home equity line of credit portfolio had not converted from the interest-only draw
period and had not begun amortizing. However, during the year ended December 31, 2015, approximately 40% of
these borrowers made annual principal payments of at least $500 on their home equity lines of credit and slightly
under half of those borrowers reduced their principal balance by at least $2,500.
The following table outlines when one- to four-family and home equity lines of credit convert to amortizing
by percentage of the one- to four-family and home equity line of credit portfolios, respectively, at December 31, 2015:
Period of Conversion to Amortizing Loan
Already amortizing
Through December 31, 2016
Year ending December 31, 2017
Year ending December 31, 2018 or later
% of One- to Four-Family
Portfolio
% of Home Equity Line of
Credit Portfolio
61%
17%
22%
—%
39%
45%
15%
1%
We track and review factors to predict and monitor credit risk in the mortgage loan portfolio on an ongoing
basis. These factors include: loan type, estimated current LTV/CLTV ratios, delinquency history, borrowers’ current
credit scores, housing prices, loan vintage and geographic location of the property. We believe the LTV/CLTV ratios
and credit scores are the key factors in determining future loan performance. The factors are updated on at least a
quarterly basis. For the consumer and other loan portfolio, we track and review delinquency status to predict and
monitor credit risk on at least a quarterly basis.
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The following tables show the distribution of the mortgage loan portfolios by credit risk factor at
December 31, 2015 and 2014 (dollars in millions):
Current LTV/CLTV
<=80%
(1)
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,
2015
2014
2015
2014
$
1,519
$
1,757
$
609
227
133
807
311
185
843
549
420
302
$
1,081
755
557
441
$
2,488
$
3,060
$
2,114
$
2,834
77%
71%
79%
71%
90%
81%
92%
80%
(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. For home equity loans in the second lien position, the original balance of the first lien
loan at origination date and updated valuations on the property underlying the loan are used to calculate CLTV. Current property values are
updated on a quarterly basis using the most recent property value data available to us. For properties in which we did not have an updated
valuation, we utilized home price indices to estimate the current property value.
(2) The average estimated current LTV/CLTV ratio reflects the outstanding balance at the balance sheet date and the maximum available line
for home equity lines of credit, divided by the estimated current value of the underlying property.
(3) Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family purchased loans
and home equity installment loans and maximum available line for home equity lines of credit.
(1)
Current FICO
>=720
719 - 700
699 - 680
679 - 660
659 - 620
<620
One- to Four-Family
December 31,
Home Equity
December 31,
2015
2014
2015
2014
$
1,423
$
1,734
$
1,069
$
1,487
246
198
150
198
273
296
260
197
237
336
222
183
152
203
285
292
238
203
258
356
Total mortgage loans receivable
$
2,488
$
3,060
$
2,114
$
2,834
(1) FICO scores are updated on a quarterly basis; however, there were approximately $39 million and $49 million of one- to four-family loans
at December 31, 2015 and 2014, respectively, and $3 million and $4 million of home equity loans, respectively, for which the updated FICO
scores were not available. For these loans, the current FICO distribution included the most recent FICO scores where available, otherwise
the original FICO score was used.
The average age of our mortgage loans receivable was 9.9 and 8.9 years at December 31, 2015 and 2014,
respectively. Approximately 37% and 38% of our mortgage loans receivable were concentrated in California at
December 31, 2015 and 2014, respectively. No other state had concentrations of mortgage loans that represented 10%
or more of our mortgage loans receivable at December 31, 2015 and 2014.
Allowance for Loan Losses
The allowance for loan losses is management’s estimate of probable losses inherent in the loan portfolio at 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 general allowance for loan losses includes a qualitative component to
account for a variety of factors that present additional uncertainty that may not be fully considered in the quantitative
loss model but are factors we believe may impact the level of credit losses. For additional information on
management's estimate of the allowance for loan losses, see Summary of Critical Accounting Policies and Estimates.
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The following table presents the allowance for loan losses by loan portfolio at December 31, 2015 and 2014
(dollars in millions):
One- to Four-Family
December 31,
Home Equity
December 31,
Consumer and Other
Total
December 31,
December 31,
2015
2014
2015
2014
2015
2014
2015
2014
General
reserve:
Quantitative
component
Qualitative
component
Specific
valuation
allowance
Total allowance
for loan losses
Allowance as
a % of loans
receivable(1)
$
28
$
11
$
245
$
281
$
6
$
3
9
7
9
10
52
29
57
—
—
9
1
—
$
279
$
301
13
61
37
66
$
40
$
27
$
307
$
367
$
6
$
10
$
353
$
404
1.6%
0.9%
14.5%
12.9%
1.9%
2.1%
7.1%
6.3%
(1) Allowance as a percentage of loans receivable is calculated based on the gross loans receivable including net unamortized premiums for
each respective category.
Total loans receivable designated as held-for-investment decreased $1.4 billion during year ended
December 31, 2015. The allowance for loan losses was $353 million, or 7% of total loans receivable, as of
December 31, 2015 compared to $404 million, or 6% of total loans receivable, as of December 31, 2014, reflecting
continued improvement in economic conditions, recoveries of previous charge-offs and loan portfolio run-off, offset
by the impact of enhancements to our modeling practices for the allowance for loan losses during the year ended
December 31, 2015. For additional information on management's estimate of the allowance for loan losses, see
Summary of Critical Accounting Policies and Estimates.
Troubled Debt Restructurings
TDRs include two categories of loans: (1) loan modifications completed under our loss mitigation programs
in which economic concessions were granted to borrowers experiencing financial difficulty, and (2) loans that have
been charged-off based on the estimated current value of the underlying property less estimated selling costs due to
bankruptcy notification even if the loan has not been modified under the Company’s programs. The following table
shows total TDRs by category at December 31, 2015 and 2014 (dollars in millions):
December 31, 2015
One- to four-family
Home equity
Total
December 31, 2014
One- to four-family
Home equity
Total
Loans Modified
as TDRs(1)
Bankruptcy
Loans
Total TDRs
$
$
$
$
170
164
334
185
169
354
$
$
$
$
116
38
154
131
48
179
$
$
$
$
286
202
488
316
217
533
(1)
Includes loans modified as TDRs that also had received a bankruptcy notification of $42 million at both December 31, 2015 and 2014.
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The following table shows total TDRs by delinquency category at December 31, 2015 and 2014 (dollars in
millions):
December 31, 2015
One- to four-family
Home equity
Total
December 31, 2014
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
$
$
$
$
212
162
374
232
178
410
$
$
$
$
19
11
30
24
14
38
$
$
$
$
8
8
16
12
6
18
$
$
$
$
47
21
68
48
19
67
$
$
$
$
286
202
488
316
217
533
TDRs on accrual status, which are current and have made six or more consecutive payments, were $226
million and $248 million at December 31, 2015 and 2014, respectively.
Troubled Debt Restructurings – Loan Modifications
We believe the distinction between loans modified as TDRs and total TDRs, which include bankruptcy loans,
is important. Our loan modification programs focus on the mitigation of potential losses through making an economic
concession to a borrower, whereas with loans for which we have received bankruptcy notification we have not taken
any loss mitigation actions. The following table shows loans modified as TDRs by delinquency category at
December 31, 2015 and 2014 (dollars in millions):
December 31, 2015
One- to four-family
Home equity
Total
December 31, 2014
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
$
$
$
$
138
139
277
152
145
297
$
$
$
$
11
8
19
14
10
24
$
$
$
$
5
6
11
7
5
12
$
$
$
$
16
11
27
12
9
21
$
$
$
$
170
164
334
185
169
354
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The following table shows loans modified as TDRs and the specific valuation allowance by loan portfolio as
well as the percentage of total expected losses at December 31, 2015 and 2014 (dollars in millions):
Recorded
Investment in
Modifications
before
Charge-offs
Charge-offs
Recorded
Investment in
Modifications
Specific
Valuation
Allowance
Net Investment
in
Modifications
Specific
Valuation
Allowance
as a % of
Modifications
Total
Expected
Losses
December 31, 2015
One- to four-family
Home equity
Total
December 31, 2014
One- to four-family
Home equity
Total
$
$
$
$
216
284
500
231
305
536
$
$
$
$
(46) $
(120)
(166) $
(46) $
(136)
(182) $
170
164
334
185
169
354
$
$
$
$
(9) $
(52)
(61) $
(9) $
(57)
(66) $
161
112
273
176
112
288
5%
32%
18%
5%
34%
19%
25%
61%
45%
24%
63%
46%
The recorded investment in loans modified as TDRs includes the charge-offs related to certain loans that were
written down to the estimated current value of the underlying property less estimated selling costs. These charge-offs
were recorded on modified loans that were delinquent in excess of 180 days, in bankruptcy, or when certain
characteristics of the loan, including CLTV, borrower’s credit and type of modification, cast substantial doubt on the
borrower’s ability to repay the loan.
Included in allowance for loan losses was a specific valuation allowance of $61 million and $66 million that
was established for loans modified as TDRs at December 31, 2015 and 2014, 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 total expected loss on loans modified as TDRs includes both the previously recorded charge-offs and the
specific valuation allowance. Total expected losses on loans modified as TDRs as a percentage of total recorded
investments in modifications before charge-offs decreased from 46% at December 31, 2014 to 45% at December 31,
2015.
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Net Charge-offs
The following table provides an analysis of net charge-offs for the past five years (dollars in millions):
Allowance for loan losses, beginning of period
$
Provision (benefit) for loan losses
Charge-offs:
Year Ended December 31,
2015
2014
2013
2012
2011
$
404
(40)
$
453
36
$
481
143
823
355
$
1,031
441
One- to four-family
Home equity
Consumer and other
Total charge-offs
Recoveries:(1)
One- to four-family
Home equity
Consumer and other
Total recoveries
Net charge-offs
Allowance for loan losses, end of period
Net charge-
offs to average loans receivable outstanding
(2)
(31)
(11)
(44)
—
26
7
33
(11)
353
$
$
(44)
(65)
(17)
(126)
11
24
6
41
(85)
404
$
(41)
(157)
(33)
(231)
14
34
12
60
(171)
453
$
(190)
(517)
(51)
(758)
9
40
12
61
(697)
481
$
(229)
(457)
(59)
(745)
21
58
17
96
(649)
823
0.2%
1.2%
1.8%
5.8%
4.4%
(1) Recoveries include the impact of mortgage originator settlements.
The following table allocates the allowance for loan losses by loan category for the past five years (dollars in
millions):
2015
2014
December 31,
2013
2012
2011
Amount
%(1)
Amount
%(1)
Amount
%(1)
Amount
%(1)
Amount
%(1)
One- to four-family
Home equity
Consumer and other
$
40
307
6
50.3% $
42.8
6.9
27
367
10
48.2% $
44.6
7.2
102
326
25
52.4% $
40.5
7.1
184
257
40
51.8% $
40.2
8.0
314
463
46
50.7%
40.8
8.5
Total allowance for
loan losses
$
353
100.0% $
404
100.0% $
453
100.0% $
481
100.0% $
823
100.0%
(1)
Represents percentage of loans receivable in the category to total loans receivable, excluding premiums (discounts).
Loan losses are recognized when, based on management's estimate, 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 has received bankruptcy notification, 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 selling costs. Modified loans considered TDRs are charged off
when they are identified as collateral dependent based on certain terms of the modification, which includes assigning a
higher level of risk to loans in which the LTV or CLTV is greater than 110% or 125%, respectively, a borrower’s credit
score is less than 600 and certain types of modifications, such as interest-only payments. 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, 2015 compared to 2014 decreased by $74 million. The
higher net charge-offs during the year ended December 31, 2014 were mainly due to a charge-off of $42 million
related to our sale of one- to four-family loans modified as TDRs. Additionally, net charge-offs for the years ended
December 31, 2015 and 2014 included $2 million and $11 million of benefit recorded from settlements with third
party mortgage originators, respectively. The decrease in net charge-offs for the year ended December 31, 2015
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compared to 2014 also reflected the improving economic conditions, as evidenced by home price improvement and
portfolio run-off. The timing and magnitude of charge-offs are affected by many factors and we anticipate variability
from quarter to quarter, particularly as home equity lines of credit convert to amortizing loans.
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 will likely be charged off. 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. The following table shows the comparative data for loans delinquent 90 to 179 days at
December 31, 2015 and 2014 (dollars in millions):
One- to four-family
Home equity
Consumer and other
Total loans delinquent 90-179 days
Loans delinquent 90-179 days as a percentage of gross loans receivable
December 31,
2015
2014
26
31
1
58
$
$
28
29
1
58
1.2%
0.9%
$
$
In addition, 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 at December 31, 2015 and 2014 (dollars in millions):
One- to four-family
Home equity
Consumer and other
Total special mention loans
Special mention loans receivable as a percentage of gross loans receivable
December 31,
2015
2014
$
72
52
6
88
60
7
130
$
155
2.6%
2.4%
$
$
The trend in special mention loan balances is generally indicative of the expected trend for charge-offs in
future periods, as these loans have a greater propensity to migrate into nonaccrual status and ultimately charge-off.
One- to four-family loans are generally secured in a first lien position by real estate assets, reducing the potential loss
when compared to an unsecured loan. Home equity loans are generally secured by real estate assets; however, the
majority of these loans are secured in a second lien position, which substantially increases the potential loss when
compared to a first lien position. The loss severity of our second lien home equity loans was approximately 96% for
the year ended December 31, 2015.
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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 (including loans in
bankruptcy) 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 receivable
Real estate owned and other repossessed assets, net
December 31,
2015
2014
2013
2012
2011
$ 263
$ 294
$ 526
$ 639
$
154
1
418
29
165
1
460
38
164
3
693
53
248
6
893
71
930
281
5
1,216
88
Total nonperforming assets, net
$ 447
$ 498
$ 746
$ 964
$ 1,304
Nonperforming loans receivable as a percentage of gross loans
receivable
One- to four-family allowance for loan losses as a percentage of
one- to four-family nonperforming loans receivable
Home equity allowance for loan losses as a percentage of home
equity nonperforming loans receivable
Consumer and other allowance for loan losses as a percentage of
consumer and other nonperforming loans receivable
Total allowance for loan losses as a percentage of total
nonperforming loans receivable
8.5%
7.2%
8.1%
8.4%
9.2%
15.3%
9.1% 19.5% 28.8%
33.8%
198.8% 222.5% 198.3% 104.0%
164.6%
667.0% 774.6% 868.3% 617.2% 1,000.5%
84.6% 87.8% 65.4% 53.8%
67.7%
Nonperforming assets, net decreased by $51 million to $447 million at December 31, 2015 when compared to
December 31, 2014. This decrease reflected continued improvement in economic conditions and loan portfolio run-off.
During the year ended December 31, 2015, we recognized $16 million of operating interest income on loans
that were nonperforming at December 31, 2015. If our nonperforming loans at December 31, 2015 had been
performing in accordance with their terms, we would have recorded additional operating interest income of
approximately $15 million for the year ended December 31, 2015. At December 31, 2015 there were no commitments
to lend additional funds to any of these borrowers.
Securities
We focus primarily on security type and credit rating to monitor credit risk in our securities portfolios. 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 at December 31, 2015. The amortized cost of these
securities accounted for over 99% of our total securities portfolio at December 31, 2015. We review the remaining debt
securities that were not backed by the U.S. government or its agencies according to their credit ratings from S&P, Moody’s
and Fitch where available. At December 31, 2015, all municipal bonds and corporate bonds were rated investment grade
(defined as a rating equivalent to a Moody’s rating of "Baa3" or higher, or a S&P or Fitch rating of "BBB-" or higher).
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The 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 in Part II. 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.
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Critical Accounting Estimates
We believe that certain accounting estimates are critical because they 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. Our critical accounting estimates are
described below:
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 ongoing evaluations of the loan
portfolio and loss forecasting assumptions. As of December 31, 2015, the allowance for loan losses was $353 million
on $4.9 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. For loans that are not
TDRs, we establish a general allowance and evaluate the adequacy of the allowance for loan losses by loan portfolio
segment: one- to four-family, home equity and consumer and other. For modified loans accounted for as TDRs that are
valued using the discounted cash flow model, we establish a specific allowance by forecasting losses, including
economic concessions to borrowers, over the estimated remaining life of these loans.
The estimate of the allowance for loan losses continues to be 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.
Total loans receivable designated as held-for-investment decreased $1.4 billion during the year ended
December 31, 2015. The allowance for loan losses was $353 million, or 7% of total loans receivable, as of December
31, 2015 compared to $404 million, or 6% of total loans receivable, as of December 31, 2014. The decrease in the
allowance for loan losses primarily resulted from the following factors:
•
•
better than expected loan performance, including favorable delinquency trends, faster prepayments across
the portfolios and lower than expected defaults on balloon loans maturing; and
resolution of uncertainties related to servicer transfers, which drove the majority of the decrease in the
qualitative component.
During the year ended December 31, 2015, we implemented a new loss forecasting model that better aligned
to our run-off one- to four-family and home equity loan portfolios with loans approaching amortization resets. While
there were no material changes in assumptions and methodologies in the new model and the implementation did not
have a material impact on our allowance for loan losses, the implementation process triggered a re-evaluation of the
time period of forecasted loan losses included in the general allowance. Based on our review of recent loan
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performance, current economic conditions and their impact on borrower behavior and the timing of default in the new
model, we extended the loss emergence period from 12 months to 18 months for both portfolios. The extended
emergence period resulted in approximately $40 million of additional allowance for loan losses as of December 31,
2015. The new loss forecasting model continues to be sensitive to key risk factors within our one- to four-family and
home equity loan portfolios, which include but are not limited to loan type, delinquency history, LTV/CLTV ratio and
borrowers’ credit scores and the forecasted loan losses are estimated based on these types of loan-level attributes. We
utilize historical mortgage loan performance data to develop the forecast of delinquency and default for these risk
segments.
During the year ended December 31, 2015, we also made the following enhancements to our quantitative
allowance methodology for identifying higher risk loans in one- to four-family and home equity loan portfolios due to
newly available performance information. These enhancements resulted in approximately $45 million of additional
allowance as of December 31, 2015:
• We extended the period of our forecasted loan losses captured within the general allowance to include the
total probable loss over the remaining life on a subset of higher risk interest-only loans in the one- to
four-family loan portfolio.
• We further refined the criteria utilized in identifying higher risk home equity lines of credit for which we
include the total probable loss over the remaining life within the general allowance.
The general allowance for loan losses also included a qualitative component to account for a variety of factors
that present additional uncertainty that may not be fully considered in the quantitative loss model but are factors we
believe may impact the level of credit losses. We utilize a qualitative factor framework whereby, on a quarterly basis,
management assesses the risk associated with three primary sets of factors: external factors, internal factors, and
portfolio specific factors. The uncertainty related to these factors may expand over time, temporarily increasing the
qualitative component in advance of the more precise identification of these probable losses being captured within the
quantitative component of the general allowance. The total qualitative component was $13 million and $37 million as
of December 31, 2015 and December 31, 2014, respectively.
Effects if Actual Results Differ
It is difficult to estimate how potential changes in the quantitative and qualitative factors, including the
impact of loans converting from interest only to amortizing loans or requiring borrowers to repay the loan in full at the
end of the draw period, might impact the allowance for loan losses. Our underlying assumptions and judgments could
prove to be inaccurate, which could materially impact our 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.
Asset Impairment
Description
In addition to the allowance for loan losses, management also utilizes estimates and assumptions when
reviewing other assets for impairment in accordance with GAAP, including the assessments of goodwill and
investment securities for impairment:
• Goodwill is allocated to reporting units, which are components of the business that are operating segments or
one level below operating segments. At December 31, 2015, all $1.8 billion of our goodwill was allocated to
the retail brokerage reporting unit. In testing goodwill for impairment, the fair value of our reporting unit was
estimated using a combination of the income and market approaches.
• When evaluating available-for sale and held-to-maturity securities for impairment, management makes
assumptions about its ability and intent to hold securities with unrealized losses until anticipated recovery and
whether, based on that decision, an other-than-temporary impairment exists. As of December 31, 2015, our
available-for-sale and held-to-maturity security portfolios included certain debt securities with gross
unrealized losses of $257 million, 87% of which was in agency mortgage-backed securities.
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Judgments
Estimating the fair value of reporting units in the goodwill impairment evaluation is a subjective process that
involves the use of estimates and judgments. When using the cash flow approach, we utilize cash flow forecasts from
our five year projections, discount rates and applicable control premiums. When using the market approach, we look
at multiples of similar publicly traded companies. The fair value analysis incorporates sensitivity analysis around key
assumptions. Fair value as a percentage of book value of the retail brokerage reporting unit was approximately 350%
as of December 31, 2015.
When determining whether an OTTI exists for securities with unrealized losses, management must consider its
intent to hold a security to recovery as well as 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.
Effects if Actual Results Differ
Based upon the results of our annual analysis, we have concluded that our goodwill balance is not impaired as
of December 31, 2015. However, we could be exposed to increased risk of impairment if future operating results or
macroeconomic conditions differ significantly from management’s current assumptions. Similarly, management
intends to, and believes that we will be able to, hold our investments in unrealized loss positions until recovery and no
OTTI was recognized during the year ended December 31, 2015. If management's assumptions change, we could have
to record a pre-tax impairment loss equal to the amount of unrealized loss for the security.
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 bases of assets and liabilities. These differences result in deferred tax
assets and liabilities, the net amount of which we show as a single line item on the consolidated balance sheet. We
must also assess the likelihood that 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, we generally record a corresponding income tax expense in the consolidated statement of income in the
period of the change. Conversely, to the extent circumstances indicate that realization is more likely than not, the
valuation allowance is decreased to the amount realizable, which generates an income tax benefit. At December 31,
2015 we had net deferred tax assets of $1.0 billion, net of a valuation allowance (on state and foreign country deferred
tax assets) of $82 million.
Judgments
Management must make judgments to determine income tax expense (benefit), deferred tax assets and
liabilities and any valuation allowance to be recorded against deferred tax assets. Changes in our estimates occur
periodically due to changes in 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 corresponding income tax expense if it is determined, based on evaluation of available evidence
at the time the determination is made, that it is more likely than not that some or all of the deferred tax assets will not
be realized. As of December 31, 2015, we did not establish a valuation allowance against our federal deferred tax
assets as we believe that it is more likely than not that all of these assets will 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.
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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 12 years,
including through uncertain economic and regulatory environments. Our business is driven by brokerage customer
activity and includes trading, brokerage related 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. Another factor is the sustained profitability of the balance sheet management
segment driven by various credit loss mitigation activities and improving economic conditions that benefited both our
loan portfolio as well as the securities portfolio. We expect to utilize the majority of our existing federal deferred tax
assets within the next three years.
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, 2015, we had total state deferred tax assets, net of
federal benefit, of approximately $177 million related to our state net operating loss carryforwards and temporary
differences with a valuation allowance of $65 million against such net deferred tax assets.
Effects if Actual Results Differ
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 or increased, which could have a material adverse effect on our financial condition and results of
operations.
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 based on the applicable accounting guidance and, if designated as a hedge, the type
of hedge designation. 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, our documentation must indicate the
intention to designate the derivative as a hedge of a specific asset or liability or a future cash flow at its inception.
Effectiveness of the hedge relationship must be monitored throughout the hedge period.
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 (1) the
derivative instrument and (2) the underlying assets or liabilities are recognized in the gains (losses) on securities and
other line item in the consolidated statement of income. 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 change 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 reclassified from
accumulated other comprehensive loss into net operating interest income as a yield adjustment in the same period the
hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivative
instrument in a cash flow hedge is reported in the gains (losses) on securities and other line item in the consolidated
statement of income.
Judgments
Cash flow hedge relationships are treated as effective hedges as long as the hedged forecasted transactions
remain probable of occurring and the hedges continue to meet the requirements of the applicable accounting guidance.
At December 31, 2014, accumulated other comprehensive loss attributable to cash flow hedges, pre-tax, was $422
million. These cash flow hedges were used to hedge the forecasted transactions related to repurchase agreements and
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FHLB advances. Following E*TRADE Clearing's move out from under E*TRADE Bank on July 1, 2015, we
evaluated the sufficiency of our capital and liquidity position and, in early September, management and the Board of
Directors concluded that E*TRADE Bank would deploy excess capital to terminate the $4.4 billion of legacy
wholesale funding obligations. As the Company's intent changed and the hedged forecasted transactions became
probable of not occurring, the Company reclassified $370 million of pre-tax losses on cash flow hedges from
accumulated other comprehensive loss into earnings during 2015.
Effects if Actual Results Differ
If our hedging strategies were to no longer meet the criteria for applying hedge accounting, we could no
longer apply hedge accounting and our reported results would be significantly affected, which could 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, 2015, 28% and less than
1% of total assets and total liabilities, respectively, represented financial instruments measured at fair value on a
recurring basis. Certain other assets are recorded at fair value on a nonrecurring basis: 1) one- to four-family and home
equity loans in which the amount of the loan balance in excess of the estimated current value of the underlying
property less estimated selling costs has been charged-off; and 2) real estate owned that is carried at the lower of the
property's carrying value or fair value less estimated selling costs. In addition, 64% and 99% of total assets and total
liabilities, respectively, represented financial instruments not carried at fair value on the consolidated balance sheet.
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. 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
As of December 31, 2015, none of our assets or liabilities measured at fair value on a recurring basis were
categorized as Level 3 and $89 million of our assets measured at fair value on a nonrecurring basis were categorized as
Level 3. In addition, our $4.9 billion loan portfolio was categorized as Level 3 for disclosure purposes as of December
31, 2015. While the 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 valuation
information considered.
Effects if Actual Results Differ
Different methodologies or assumptions could be used to determine the fair value of certain assets and
liabilities. These could result in different estimates of fair value, which could materially impact the amounts of realized
and unrealized gains and losses recognized in our statements of financial condition and results of operations.
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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
Page
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
31
79
81
82
80
80
80
72
71
102
71
70
70
31
136
136
32
83
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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):
2015 Compared to 2014
Increase (Decrease) Due To
2014 Compared to 2013
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
Total enterprise interest-earning
assets(2)
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
Change in enterprise net
interest income
(67) $
(44)
18
(93) $
(7)
43
$
(67) $
(5)
26
15
—
—
(17)
(48)
—
—
(42)
(13)
—
(55)
— $
(39)
(8)
(3)
1
—
34
12
1
—
17
(15)
(63)
(4)
(3)
(12)
(4)
3
(20)
(4)
(3)
(54)
(17)
3
(75)
54
—
1
(3)
(5)
—
—
(15)
—
—
(15)
(5) $
16
(98)
9
30
(14)
(1)
—
50
76
(5)
(1)
(10)
(3)
—
(19)
73
40
(1)
1
47
71
(5)
(1)
(25)
(3)
—
(34)
$
7
$
5
$
12
$
10
$
95
$
105
(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 million for each of the years ended December 31, 2015,
2014 and 2013.
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Lending Activities
The following table presents the balance and associated percentage of each major loan category (dollars in
millions):
2015
2014
2013
2012
2011
Balance
%
Balance
%
Balance
%
Balance
%
Balance
%
December 31,
One- to four-family
$ 2,488
50.3% $ 3,060
48.2% $ 4,475
52.5% $ 5,442
51.8% $ 6,616
50.7%
Home equity
Consumer and other:
2,114
341
42.8
6.9
2,834
455
44.6
7.2
3,454
602
40.4
7.1
4,224
845
40.2
8.0
5,329
1,113
40.8
8.5
Total loans receivable
4,943
100.0%
6,349
100.0%
8,531
100.0%
10,511
100.0%
13,058
100.0%
Adjustments:
Premiums (discounts) and
deferred fees on loans
Allowance for loan losses
Total adjustments
23
(353)
(330)
34
(404)
(370)
45
(453)
(408)
69
(481)
(412)
98
(823)
(725)
Loans receivable, net
$ 4,613
$ 5,979
$ 8,123
$ 10,099
$ 12,333
The following table shows the contractual maturities of the loan portfolio at December 31, 2015, 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
< 1 Year
(1)
Due in
1-5 Years
>5 Years
Total
$
$
81
97
40
218
$
$
356
442
182
980
$
$
2,051
1,575
119
3,745
$
$
2,488
2,114
341
4,943
(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, 2015 (dollars in millions):
One- to four-family
Home equity
Consumer and other
Total loans receivable
Securities
Interest Rate Type
Fixed
Adjustable
Total
$
$
366
355
301
1,022
$
$
2,041
1,662
—
3,703
$
$
2,407
2,017
301
4,725
Our investment portfolio includes a mortgage-backed securities portfolio, other debt securities and equity
securities that are classified into the following categories: 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 Ginnie Mae, which is backed by the
full faith and credit of the U.S. Government; and
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•
Collateralized mortgage obligations, which are guaranteed by one of the three above
organizations.
Our other debt securities include agency debt securities guaranteed by the Small Business Administration,
agency debentures which are unsecured senior debt offered by Fannie Mae, Freddie Mac and other government
agencies and U.S. Treasuries.
Available-for-sale securities are carried at fair value with the unrealized gains and losses reflected as a
component of accumulated other comprehensive income. 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 securities that we held and classified as
available-for-sale or held-to-maturity (dollars in millions):
2015
December 31,
2014
2013
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Available-for-sale securities:
Debt securities:
Mortgage-backed securities:
Agency mortgage-backed
securities and CMOs
Non-agency CMOs
Total mortgage-backed
securities
Agency debentures
U.S. Treasuries
Agency debt securities
Municipal bonds
Corporate bonds
$ 11,888
$ 11,763
$ 11,156
$ 11,164
$ 12,505
$ 12,236
—
—
—
—
17
14
11,888
11,763
11,156
11,164
12,522
12,250
551
147
55
35
5
557
143
55
35
4
620
—
487
40
5
648
—
499
40
4
520
—
832
42
6
466
—
831
40
5
Total debt securities
Publicly traded equity securities(1)
12,681
12,557
12,308
12,355
13,922
13,592
33
32
33
33
—
—
Total available-for-sale securities $ 12,714
$ 12,589
$ 12,341
$ 12,388
$ 13,922
$ 13,592
Held-to-maturity securities:
Agency mortgage-backed securities
and CMOs
Agency debentures
Agency debt securities
Other non-agency debt securities
$ 10,353
$ 10,444
$
9,793
$
9,971
$
8,359
$
127
2,523
10
125
2,544
10
164
2,281
10
166
2,329
10
164
1,658
—
8,293
168
1,631
—
Total held-to-maturity securities
$ 13,013
$ 13,123
$ 12,248
$ 12,476
$ 10,181
$ 10,092
(1) Publicly traded equity securities consisted of investments in a mutual fund related to the Community Reinvestment Act.
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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, 2015 (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
debt securities:
Agency
mortgage-backed
securities and
CMOs
$
Agency
debentures
U.S. Treasuries
Agency debt
securities
Municipal bonds
Corporate bonds
Total available-
for-sale debt
securities
Held-to-maturity
debt securities:
Agency mortgage-
backed securities
and CMOs
$
Agency debentures
Agency debt
securities
Other non-agency
debt securities
Total held-to-
maturity debt
securities
Borrowings
—
—
—
—
—
—
— $
—
—
—
—
—
41
—
—
—
—
—
33
—
—
10
—
—
1.49%
9
92
—
2.10% $ 2,400
2.62% $ 9,447
2.48% $ 11,888
2.51%
—
—
—
—
—
8
—
—
—
—
2.41%
—
—
—
—
543
147
55
35
5
3.74%
2.81%
2.71%
3.97%
0.83%
551
147
55
35
5
$
—
$
41
$ 2,408
$ 10,232
$ 12,681
2.59% $ 1,065
3.18% $ 2,270
2.92% $ 6,985
3.14% $ 10,353
1.88%
118
2.79%
—
—
127
3.21%
1,223
2.77%
1,208
2.87%
2,523
2.84%
—
—
—
—
—
10
1.49%
$
43
$ 1,166
$ 3,611
$ 8,193
$ 13,013
3.72%
2.81%
2.71%
3.97%
0.83%
3.09%
2.73%
Deposits represent our most significant and stable source of funding. In addition, we have utilized trust
preferred securities and wholesale funding sources such as FHLB advances and 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 mortgage loans and other assets—
principally securities that are obligations of, or guaranteed by, the U.S. Government—provided we meet certain
creditworthiness standards.
We also have raised funds by entering into agreements to repurchase the same or similar securities. The
counterparties to these agreements hold the securities in custody. We account for repurchase agreements as borrowings
and secure them with designated fixed- and variable-rate debt securities. We also participated in the Federal Reserve
Bank’s term investment option and treasury, tax and loan borrowing programs. We have used the proceeds from these
transactions to meet our cash flow or asset/liability matching needs. The Company terminated $4.4 billion of
repurchase agreements and FHLB advances during 2015, but may continue utilizing these funding sources for short
term liquidity and contingency funding requirements.
The following table sets forth information regarding the weighted-average interest rates and the highest and
average month-end balances of repurchase agreements, FHLB advances and trust preferred securities (dollars in
millions):
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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, 2015:
Securities sold under agreements to
repurchase
FHLB advances
Trust preferred securities
At or for the year ended December 31, 2014:
Securities sold under agreements to
repurchase
FHLB advances
Trust preferred securities
At or for the year ended December 31, 2013:
Securities sold under agreements to
repurchase
FHLB advances
Trust preferred securities
$
$
$
$
$
$
$
$
$
82
—
409
3,672
871
428
4,543
851
428
0.14% $
3,829
—% $
3.04% $
884
428
0.44% $
0.39% $
2.92% $
0.57% $
0.39% $
2.93% $
4,920
871
428
4,599
1,191
428
$
$
$
$
$
$
$
$
$
2,490
588
422
3,993
860
428
4,466
859
428
2.76%
5.50%
3.09%
3.07%
6.06%
3.03%
3.32%
6.43%
3.07%
(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.
GLOSSARY OF TERMS
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 average total assets—Assets composed of average total assets plus/(less) unrealized losses (gains)
on available-for-sale securities and cash flow hedges, less disallowed deferred tax assets, goodwill and certain other
intangible assets, and other applicable adjustments.
Agency—U.S. Government sponsored enterprises 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 revenue 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.
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Brokerage related cash—Customer sweep deposits held at banking subsidiaries, customer payables and
customer assets held by third parties.
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.
CFTC—Commodity Futures Trading Commission.
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.
Consumer loans—Loans that are secured by real personal property, such as recreational vehicles.
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 or notification.
Customer assets—Market value of all customer assets held by the Company including security holdings,
deposits and customer payables, as well as customer assets held by third parties and vested unexercised options.
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 options and swaps.
DIF—Depositors Insurance Fund.
Earnings at Risk ("EAR")—The sensitivity of GAAP earnings to changes in interest rates over a twelve
month horizon. It is a short-term measurement of interest rate risk and does not consider risks beyond the simulation
time horizon. In addition, it requires reinvestment, funding, and hedging assumptions for the horizon.
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.
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—Assets such as loans, available-for-sale securities, held-to-maturity
securities, margin receivables, 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.
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.
ESDA—Extended insurance sweep deposit accounts.
Exchange-traded funds ("ETFs")—A fund that invests in a group of securities and trades like an individual
stock on an exchange.
E*TRADE Savings Bank—a federally chartered savings bank that is wholly-owned by E*TRADE Bank.
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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.
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.
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).
Interest rate cap—An option 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 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).
LTV—Loan-to-value.
NASDAQ—National Association of Securities Dealers Automated Quotations.
Net new brokerage assets—The total inflows to all new and existing brokerage customer accounts less total
outflows from all closed and existing brokerage customer accounts, excluding the effects of market movements in the
value of brokerage customer assets.
NFA—National Futures Association.
NOLs—Net operating losses.
Nonperforming assets—Assets originally acquired to earn income (nonperforming loans) and those not
intended to earn income (real estate owned). 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 (including loans in bankruptcy) 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.
OCC—Office of the Comptroller of the Currency.
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.
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PII—Personally Identifiable Information.
Real estate owned 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.
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.
Sweep deposit accounts—Accounts with the functionality to transfer customer deposit balances to and from a
FDIC insured account.
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, less disallowed deferred tax assets, goodwill and certain other intangible assets, and other applicable
adjustments.
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 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.
Managing 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 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:
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•
•
•
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 premiums 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, 2015, 91% of our total assets were enterprise interest-
earning assets and we had no securities classified as trading.
At December 31, 2015, approximately 59% of total assets were residential real estate loans and available-for-
sale and held-to-maturity mortgage-backed securities. The values of these assets are sensitive to changes in interest
rates, as well as expected prepayment levels. As interest rates increase, fixed rate residential mortgages and mortgage-
backed securities tend to exhibit lower prepayments. The inverse is true in a falling rate environment.
When real estate loans prepay, unamortized premiums and/or discounts are recognized immediately in
operating interest income. Depending on the timing of the prepayment, these adjustments to operating income would
impact 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 customer payables. Deposit
products, including sweep deposit accounts, complete savings accounts, checking accounts and other money market
and savings accounts, as well as customer payables, re-price at management’s discretion. We may continue utilizing
wholesale funding sources for short-term liquidity and contingency funding requirements.
Derivative Instruments
We use derivative instruments to help manage interest rate risk using designated hedge relationships. 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 offset 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
interest rate caps ("Caps"), "Payor Swaptions" and "Receiver Swaptions." Caps mitigate the market risk associated
with increases in 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 7—Accounting for
Derivative Instruments and Hedging Activities in Item 8. Financial Statements and Supplementary Data.
Scenario Analysis
Scenario analysis is an advanced approach to estimating interest rate risk exposure. The ALCO monitors
interest rate risk using the Economic Value of Equity (“EVE”) approach and the Earnings-at-Risk (“EAR”) approach.
Prior to the move of E*TRADE Clearing out from under E*TRADE Bank in July 2015, interest rate risk was
monitored at the E*TRADE Bank level, as E*TRADE Bank had nearly 100% of interest-earning assets and 99% of
interest-bearing liabilities. After this move, interest rate risk is also monitored at the consolidated level, which also
includes corporate debt.
Under the 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. EVE is a long-term
sensitivity measure of interest rate risk. 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. The change in EVE amounts fluctuate
based on instantaneous 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
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mortgage loans and mortgage-backed securities increase as interest rates decline. In a rising interest rate environment,
expected prepayment rates decrease. Changes in EVE sensitivity at E*TRADE Bank from December 31, 2014 to
December 31, 2015 were also driven by balance sheet management decisions, including the termination of our legacy
wholesale funding obligations, as well as by the move of E*TRADE Clearing out from under E*TRADE Bank.
EAR is a short-term sensitivity measure of interest rate risk and illustrates the impact of alternative interest
rate scenarios on net interest income, including corporate interest expense, over a twelve month time frame. In
measuring the sensitivity of net interest income to changes in interest rates, we assume instantaneous parallel interest
rate shocks applied to the forward curve. In addition, we assume that cash flows from loan payoffs are reinvested in
mortgage-backed securities, we exclude revenue from off-balance sheet customer assets and we assume no balance
sheet growth. Changes in EAR sensitivity at E*TRADE Bank from December 31, 2014 to December 31, 2015 were
predominantly driven by the move of E*TRADE Clearing out from under E*TRADE Bank.
The sensitivity of EAR and EVE at the consolidated E*TRADE Financial level at December 31, 2015 is as
follows (dollars in millions):
Instantaneous Parallel
Change in Interest Rates
(basis points) (1)
+200
+100
-50
Economic Value of Equity
December 31, 2015
Earnings-at-Risk
December 31, 2015
Amount
Percentage
Amount
Percentage
$
$
$
(148)
58
(107)
(2.6)% $
1.0 % $
(1.9)% $
178
116
(64)
15.8 %
10.3 %
(5.7)%
The sensitivity of EAR and EVE at the E*TRADE Bank level at December 31, 2015 and 2014 is as follows
(dollars in millions):
Instantaneous Parallel
Change in Interest Rates
(basis points) (1)
+200
+100
-50
Economic Value of Equity
Earnings-at-Risk
December 31, 2015
December 31, 2014
December 31, 2015
December 31, 2014
Percentage
Amount
Percentage
Percentage
Amount
$
$
$
(433)
(87)
(33)
(9.2)% $
(1.8)% $
(0.7)% $
(353)
(127)
6
(6.6)% $
(2.4)% $
0.1 % $
Amount
48
51
(36)
5.7 % $
6.1 % $
(4.3)% $
Amount
126
72
(18)
Percentage
12.3 %
7.1 %
(1.7)%
(1) These scenario analyses assume a balance sheet size as of December 31, 2015. Any changes in size would cause the amounts to vary.
We actively manage interest rate risk positions. As interest rates change, we will 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. We compare the instantaneous parallel shift in interest rate changes in
EVE and EAR to the established limits set by the Board of Directors in order to assess interest rate risk on a monthly
basis. In the event that the percentage change in EVE or EAR exceeds the Board limits, our Chief Executive Officer,
Chief Risk Officer, Chief Financial Officer and Treasurer must all be promptly notified in writing and decide upon a
plan of remediation. In addition, the Board of Directors must be promptly notified of the exception and the planned
resolution. At December 31, 2015, the EVE and EAR percentage changes were within our Board limits.
Market Risk
Equity Securities Risk
We are indirectly exposed to equity securities risk in connection with securities collateralizing margin
receivables to customers, and risk related to our securities lending and borrowing activities. We manage risk on margin
lending by requiring customers to maintain margin collateral in compliance with regulatory and internal guidelines.
We monitor required margin levels daily and require our customers to deposit additional collateral, or to reduce
positions, when necessary. We continuously monitor customer accounts to detect excessive concentration, large orders
or positions, and other activities that indicate increased risk to us. We manage risks associated with our securities
lending and borrowing activities by requiring credit approvals for counterparties, by monitoring the market value of
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securities loaned and collateral values for securities borrowed on a daily basis and requiring additional cash as
collateral for securities loaned or return of collateral for securities borrowed when necessary, and by participating in a
risk-sharing program offered through the Options Clearing Corporation.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control system was designed to provide reasonable assurance to our
management and board of directors regarding the preparation and fair presentation of published financial statements.
Internal control over financial reporting, as defined in Rules 13a-15(f) promulgated under the Securities Exchange Act
of 1934, is 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 Company’s assets;
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 the Company’s management and directors;
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.
Management conducted an assessment of the effectiveness of the Company's internal control over financial
reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
"Internal Control-Integrated Framework (2013)." Based on this assessment, management has concluded that its
internal control over financial reporting was effective as of December 31, 2015 to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
E*TRADE Financial Corporation’s Independent Registered Public Accounting Firm, Deloitte & Touche LLP,
has issued an audit report regarding on the Company’s internal control over financial reporting, which appears on the
next page.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
E*TRADE Financial Corporation
New York, New York
We have audited the internal control over financial reporting of E*TRADE Financial Corporation and subsidiaries (the
"Company") as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013)
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, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) 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, 2015 of the Company and our
report dated February 24, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 24, 2016
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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, 2015 and 2014, and the related consolidated statements of income, comprehensive
income (loss), shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2015.
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, 2015 and 2014, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, based on the criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 24, 2016 expressed an unqualified opinion on the Company's internal control
over financial reporting.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 24, 2016
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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except share data and per share amounts)
Revenue:
Operating interest income
Operating interest expense
Net operating interest income
Commissions
Fees and service charges
Principal transactions
Gains (losses) on securities and other
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 (loss)
Total net revenue
Provision (benefit) for loan losses
Operating expense:
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
Impairment of goodwill
Restructuring and other exit activities
Other operating expenses
Total operating expense
Income before other income (expense) and income tax expense (benefit)
Other income (expense):
Corporate interest expense
Losses on early extinguishment of debt
Other
Total other income (expense)
Income before income tax expense (benefit)
Income tax expense (benefit)
Net income
Basic earnings per share
Diluted earnings per share
Shares used in computation of per share data:
Basic (in thousands)
Diluted (in thousands)
Year Ended December 31,
2015
2014
2013
$
1,215
$
1,279
$
(129)
1,086
424
210
—
(331)
—
—
—
39
342
1,428
(40)
466
124
95
41
103
88
90
81
20
—
17
82
(205)
1,074
456
200
10
36
—
—
—
38
740
1,814
36
412
120
94
79
112
79
71
78
22
—
8
70
1,207
261
1,145
633
(65)
(112)
7
(170)
91
(177)
268
0.92
0.91
$
$
$
(113)
(71)
3
(181)
452
159
293
1.02
1.00
$
$
$
$
$
$
1,207
(238)
969
420
168
73
61
(1)
(2)
(3)
35
754
1,723
143
363
108
124
104
85
73
69
89
24
142
28
66
1,275
305
(114)
—
4
(110)
195
109
86
0.30
0.29
290,762
295,011
288,705
294,103
286,991
292,589
See accompanying notes to consolidated financial statements
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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Net income
Other comprehensive income (loss)
Available-for-sale securities:
Noncredit portion of OTTI reclassification (into) out of other
comprehensive income (loss), net(1)
Unrealized gains (losses), net(2)
Reclassification into earnings, net(3)
Net change from available-for-sale securities
Cash flow hedging instruments:
Unrealized gains (losses), net(4)
Reclassification into earnings, net(5)
Net change from cash flow hedging instruments
Foreign currency translation gains (losses), net
Other comprehensive income (loss)
Comprehensive income (loss)
Year Ended December 31,
2015
2014
2013
$
268
$
293
$
86
—
(84)
(24)
(108)
(10)
271
261
(3)
150
$
418
$
—
193
(26)
167
(39)
76
37
—
204
497
$
1
(261)
(37)
(297)
67
87
154
—
(143)
(57)
(1) Amount is net of benefit from income taxes of less than $1 million for the year ended December 31, 2013.
(2) Amounts are net of benefit from income taxes of $52 million for the year ended December 31, 2015, net of provision for income taxes of
$117 million for the year ended December 31, 2014, and net of benefit from income taxes of $156 million for the year ended December 31,
2013.
(3) Amounts are net of provision for income taxes of $15 million, $16 million and $23 million for the years ended December 31, 2015, 2014
and 2013, respectively.
(4) Amounts are net of benefit from income taxes of $7 million and $29 million for the years ended December 31, 2015 and 2014, respectively,
and net of provision for income taxes of $33 million for the year ended December, 2013.
(5) Amounts are net of benefit from income taxes of $168 million, $49 million and $52 million for the years ended December 31, 2015, 2014
and 2013, respectively.
See accompanying notes to the consolidated financial statements
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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In millions, except share data)
December 31,
2015
2014
Cash and equivalents
$
2,233
$
ASSETS
Cash required to be segregated under federal or other regulations
Available-for-sale securities
Held-to-maturity securities (fair value of $13,123 and $12,476 at December 31,
2015 and December 31, 2014, respectively)
Receivables from brokers, dealers and clearing organizations
Margin receivables
Loans receivable, net (net of allowance for loan losses of $353 and $404 at
December 31, 2015 and December 31, 2014, respectively)
Property and equipment, net
Goodwill
Other intangibles, net
Deferred tax assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits
Payables to brokers, dealers and clearing organizations
Customer payables
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,
2015 and 2014; shares issued and outstanding: 291,335,241 and 289,272,576 at
December 31, 2015 and 2014, respectively
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive loss
Total shareholders’ equity
1,057
12,589
13,013
520
7,398
4,613
236
1,792
174
1,033
769
1,783
555
12,388
12,248
884
7,675
5,979
245
1,792
194
951
836
$
$
45,427
$
45,530
29,445
$
24,890
1,576
6,544
491
997
575
1,699
6,455
4,971
1,366
774
39,628
40,155
3
7,356
(1,461)
(99)
5,799
3
7,350
(1,729)
(249)
5,375
Total liabilities and shareholders’ equity
$
45,427
$
45,530
See accompanying notes to the consolidated financial statements
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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In millions)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance, December 31, 2012
286
$
Net income
Other comprehensive loss
Exercise of stock options and related
tax effects
Issuance of restricted stock, net of
forfeitures and retirements to pay
taxes
Share-based compensation
—
—
—
1
—
Balance, December 31, 2013
287
$
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
—
—
1
—
1
—
Balance, December 31, 2014
289
$
Net income
Other comprehensive income
Conversion of convertible debentures
Exercise of stock options and related
tax effects
Repurchases of common stock
Issuance of restricted stock, net of
forfeitures and retirements to pay
taxes
Share-based compensation
—
—
3
—
(2)
1
—
3
—
—
—
—
—
3
—
—
—
—
—
—
3
—
—
—
—
—
—
—
$
7,319
$
—
—
(4)
(7)
20
$
7,328
$
—
—
5
6
(13)
24
$
7,350
$
—
—
30
2
(50)
(10)
34
(2,108) $
86
—
—
—
—
(310) $
—
(143)
—
—
—
(2,022) $
293
(453) $
—
—
—
—
—
—
204
—
—
—
—
(1,729) $
268
(249) $
—
—
—
—
—
—
—
150
—
—
—
—
—
4,904
86
(143)
(4)
(7)
20
4,856
293
204
5
6
(13)
24
5,375
268
150
30
2
(50)
(10)
34
Balance at December 31, 2015
291
$
3
$
7,356
$
(1,461) $
(99) $
5,799
See accompanying notes to the consolidated financial statements
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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision (benefit) for loan losses
Depreciation and amortization (including discount amortization and
accretion)
Losses (gains) on securities and other
Impairment of goodwill
Losses on early extinguishment of debt
Share-based compensation
Deferred taxes expense (benefit)
Other
Net effect of changes in assets and liabilities:
Decrease (increase) in cash required to be segregated under federal
or other regulations
Decrease (increase) in receivables from brokers, dealers and
clearing organizations
Decrease (increase) in margin receivables
Increase (decrease) in payables to brokers, dealers and clearing
organizations
Increase in customer payables
Proceeds from sales and repayments of loans held-for-sale
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of available-for-sale securities
Proceeds from sales of available-for-sale securities
Proceeds from 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
Proceeds from sale of loans
Net decrease in loans receivable
Capital expenditures for property and equipment
Proceeds and cash transferred from sale of G1 Execution Services,
LLC
Proceeds from sale of real estate owned and repossessed assets
Net cash flow from derivatives hedging assets
97
Year Ended December 31,
2015
2014
2013
$
268
$
293
$
86
(40)
325
331
—
37
34
(176)
(6)
36
331
(36)
—
6
24
155
(2)
(502)
511
364
277
(123)
89
—
(22)
(24)
832
(6,150)
3,905
1,667
(2,614)
1,788
40
1,337
(70)
—
28
(2)
(24)
(1,322)
593
145
11
(132)
112
701
(1,564)
1,855
1,468
(3,209)
1,144
813
1,273
(87)
67
37
(15)
143
395
(61)
142
—
20
107
(1)
(689)
(182)
(549)
227
1,345
15
215
(96)
1,117
(7,042)
3,856
2,407
(2,527)
1,828
—
1,724
(47)
—
62
19
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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS—(Continued)
(In millions)
Other
Net cash provided by investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Net increase (decrease) in securities sold under agreements to
repurchase
Advances from FHLB
Payments on advances from FHLB
Net proceeds from issuance of senior notes
Payments on senior notes
Repurchases of trust preferred securities
Repurchases of common stock
Net cash flow from derivatives hedging liabilities
Other
Net cash used in financing activities
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 for income taxes, net of refunds
Non-cash investing and financing activities:
Transfers of loans held-for-investment to loans held-for-sale
Transfers from loans to other real estate owned and repossessed
assets
Transfers from other real estate owned and repossessed assets
to loans
Conversion of convertible debentures to common stock
Reclassification of market making business assets and
liabilities to business held-for-sale
Year Ended December 31,
2015
2014
2013
73
2
(69)
1,713
6
286
$
4,555
$
(1,081) $
(2,422)
(3,590)
960
(1,880)
460
(800)
(15)
(50)
(16)
(8)
(384)
450
1,783
2,233
212
8
39
27
$
$
$
$
$
— $
30
$
(871)
730
(730)
540
(940)
—
—
(170)
53
(2,469)
(55)
1,838
1,783
318
$
$
— $
795
53
16
5
$
$
$
$
— $
— $
88
2,180
(2,180)
—
—
—
—
5
2
(2,327)
(924)
2,762
1,838
277
2
41
75
—
—
79
$
$
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements
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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 brokerage and
related products and services primarily to individual retail investors under the brand "E*TRADE Financial." The
Company also provides investor-focused banking products, primarily sweep deposits, to retail investors. The
Company’s most significant, wholly-owned subsidiaries are described below:
•
•
•
•
E*TRADE Securities is a registered broker-dealer and is the primary provider of brokerage products
and services to the Company’s customers;
E*TRADE Clearing is the clearing firm for the Company’s brokerage subsidiaries and its main
purpose is to clear and settle securities transactions for customers of E*TRADE Securities;
E*TRADE Bank is a federally chartered savings bank utilized by E*TRADE's broker-dealers to
maximize the value of customer deposits. It provides the Company's customers with FDIC insurance
on a certain amount of customer deposits and provides other banking products to its customers; and
E*TRADE Financial Corporate Services is the provider of software and services for managing
equity compensation plans to the Company's corporate customers.
As of December 31, 2015, the Company's two U.S. broker-dealers, E*TRADE Clearing and E*TRADE
Securities, were no longer operating subsidiaries of E*TRADE Bank. E*TRADE Securities was moved out from
under E*TRADE Bank in February 2015 and E*TRADE Clearing was moved out from under E*TRADE Bank in July
2015. This revised organizational structure provides increased capital flexibility as it enables the Company to dividend
excess regulatory capital at the broker-dealers to the parent company with proper regulatory notifications.
Basis of Presentation—The consolidated financial statements include the accounts of the Company and its
majority-owned subsidiaries as determined under the voting interest model. Entities in which the Company has the
ability to exercise significant influence but in which the Company does not possess control are generally accounted for
by the equity method. Entities in which the Company does not have the ability to exercise significant influence are
generally carried at cost. However, investments in marketable equity securities where the Company does not have the
ability to exercise significant influence over the entities are accounted for as available-for-sale equity securities. The
Company also evaluates its initial and continuing involvement with certain entities to determine if the Company is
required to consolidate the entities under the variable interest entity ("VIE") model. This evaluation is based on a
qualitative assessment of whether the Company is the primary beneficiary of the VIE, which requires the Company to
possess both: 1) the power to direct activities that most significantly impact the economic performance of the VIE; and
2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the
VIE.
The Company's consolidated financial statements are prepared in accordance with U.S. GAAP. Intercompany
accounts and transactions are eliminated in consolidation. These consolidated financial statements reflect all
adjustments, which are all normal and recurring in nature, necessary to present fairly the financial position, results of
operations and cash flows for the periods presented.
The Company updated the presentation of its consolidated balance sheet and income statement line items, as
follows, primarily as a result of the change in composition of its balance sheet after the termination of its wholesale
funding obligations. Prior periods have been reclassified to conform to the current period presentation:
• Reclassified the revenue earned on customer assets held by third parties from operating interest income
to fees and service charges;
• Reclassified certain receivables from other assets to receivables from brokers, dealers, and clearing
organizations;
• Reclassified the Company’s investment in FHLB stock to other assets;
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• Reclassified net deferred tax assets from other assets to deferred tax assets, net;
• Reclassified certain payables from other liabilities to payables to brokers, dealers, and clearing
organizations;
• Renamed FHLB advances and other borrowings to other borrowings; and
• Reclassified securities sold under agreements to repurchase to other borrowings.
The Company reports corporate interest expense separately from operating interest expense. The Company
believes reporting these 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 expense is generated from the
operations of the Company. Corporate debt is the primary source of corporate interest expense.
Similarly, the Company reports corporate gains (losses) on sales of investments separately from gains (losses)
on securities and other. 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. Gains
(losses) on securities and other are the result of activities in the Company’s operations, namely its balance sheet
management segment. Corporate gains (losses) on sales of investments are reported in other income (expense) on the
consolidated statement of income.
Use of Estimates—Preparing the Company's consolidated financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and related notes for the periods presented. Actual results could differ from management’s estimates.
Certain significant accounting policies are critical because they are based on estimates and assumptions that require
complex and subjective judgments by management. Changes in these estimates or assumptions could materially
impact the Company’s financial condition and results of operations. Material estimates in which management believes
changes could reasonably occur include: allowance for loan losses; asset impairment, including goodwill impairment
and OTTI; estimates of effective tax rates, deferred taxes and valuation allowance; accounting for derivative
instruments; and fair value measurements.
Financial Statement Descriptions and Related Accounting Policies
Cash and Equivalents—The Company considers all highly liquid investments with original or remaining
maturities of three months or less at the time of purchase that are not required to be segregated under federal or other
regulations to be cash and equivalents. Cash and equivalents included $1.6 billion and $0.9 billion at December 31,
2015 and 2014, 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.
Available-for-Sale Securities—Available-for-sale securities consist primarily of debt securities and also
include equity securities. Securities classified as available-for-sale are carried at fair value, with the unrealized gains
and losses, after any applicable hedge accounting adjustments, reflected as a component of accumulated other
comprehensive loss, net of tax. Realized and unrealized gains or losses on available-for-sale debt and equity securities
are computed using the specific identification method. Interest earned on available-for-sale debt and equity securities
is included in operating interest income. Amortization or accretion of premiums and discounts on available-for-sale
debt securities is also recognized in operating interest income using the effective interest method over the contractual
life of the security and is adjusted to reflect actual prepayments. Realized gains and losses on available-for-sale debt
and equity securities, other than OTTI, are included in the gains (losses) on securities and other 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 and agency debt securities. Held-to-maturity securities are carried at amortized cost based
on the Company’s 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 is also
recognized in operating interest income using the effective interest method over the contractual life of the security and
is adjusted to reflect actual prepayments. Held-to-maturity securities that have an unrecognized loss (impaired
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securities) are evaluated for OTTI at each balance sheet date in a manner consistent with available-for-sale debt
securities.
Receivables from and Payables to Brokers, Dealers and Clearing Organizations—Receivables from brokers,
dealers and clearing organizations include deposits paid for securities borrowed, clearing deposits and net receivables
arising from unsettled trades. Payables to brokers, dealers and clearing organizations include deposits received for
securities loaned and net payables arising from unsettled trades.
Deposits paid for securities borrowed and deposits received for securities loaned are recorded at the amount
of cash collateral advanced or received. Deposits paid for securities borrowed transactions require the Company to
deposit cash with the lender. With respect to deposits received for securities loaned, the Company receives collateral in
the form of cash in an amount generally in excess of the market value of the securities loaned. Interest income and
interest expense are recorded on an accrual basis. The Company monitors the market value of the securities borrowed
and loaned on a daily basis, with additional collateral obtained or refunded, as necessary.
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
$10.1 billion and $10.8 billion at December 31, 2015 and December 31, 2014, respectively. Of this amount, $2.5
billion and $2.9 billion had been pledged or sold in connection with securities loans and deposits with clearing
organizations at December 31, 2015 and December 31, 2014, 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 unamortized premiums or discounts on purchased
loans, deferred fees or costs on originated loans, net charge-offs, and the allowance for loan losses. Premiums or
discounts on purchased loans and deferred fees or costs on originated 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.
Impaired Loans—The Company considers a loan to be 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—Loan modifications completed under the Company’s loss mitigation programs in which economic
concessions were granted to borrowers experiencing financial difficulty are considered TDRs. TDRs also include loans
that have been charged-off based on the estimated current value of the underlying property less estimated selling costs
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. The Company also processes minor modifications on a
number of loans through traditional collections actions taken in the normal course of servicing delinquent accounts.
Minor modifications resulting in an insignificant delay in the timing of payments are not considered economic
concessions and therefore are not classified as TDRs.
Impairment on loan modifications is measured on an individual loan level 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 selling costs. 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% or 125%, respectively, a borrower’s credit score is less than
600 and certain types of modifications, such as interest-only payments. 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.
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TDRs, excluding loans in bankruptcy, are classified as nonperforming loans at the time of modification. Such
TDRs return to accrual status after six consecutive payments are made in accordance with the modified terms.
Accruing TDRs that subsequently become delinquent will immediately return to nonaccrual status. Bankruptcy loans
are classified as nonperforming loans within 60 days of bankruptcy notification and remain on nonaccrual status
regardless of the payment history.
Nonperforming Loans—The Company classifies loans as nonperforming when they are no longer accruing
interest, which includes loans that are 90 days and greater past due, TDRs that are on nonaccrual status for all classes
of loans (including loans in bankruptcy) and certain junior liens that have a delinquent senior lien. 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 TDRs, loans in bankruptcy and certain
junior liens that have a delinquent senior lien, return to accrual status when the loan becomes less than 90 days past
due. Loans modified as TDRs return to accrual status after six consecutive payments have been made in accordance
with the modified terms. All bankruptcy loans remain on nonaccrual status regardless of the payment history. Certain
junior liens that have a delinquent senior lien remain on nonaccrual status until certain performance criteria are met.
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. In determining the adequacy of the allowance, the Company
performs ongoing evaluations of the loan portfolio and loss forecasting assumptions. As of December 31, 2015, the
allowance for loan losses was $353 million on $4.9 billion of total loans receivable designated as held-for-investment.
For loans that are not TDRs, the Company established a general allowance and evaluated the adequacy of the
allowance for loan losses by loan portfolio segment: one- to four-family, home equity and consumer and other. For
modified loans accounted for as TDRs that are valued using the discounted cash flow model, the Company established
a specific allowance by forecasting losses, including economic concessions to borrowers, over the estimated remaining
life of these loans.
The estimate of the allowance for loan losses continues to be based on a variety of quantitative and qualitative
factors, including:
•
•
•
•
•
•
•
•
the composition and quality of the portfolio;
delinquency levels and trends;
current and historical charge-off and loss experience;
the Company's historical loss mitigation experience;
the condition of the real estate market and geographic concentrations within the loan portfolio;
the interest rate climate;
the overall availability of housing credit; and
general economic conditions.
During the year ended December 31, 2015, the Company implemented a new loss forecasting model that
better aligned to our run-off one- to four-family and home equity loan portfolios with loans approaching amortization
resets. While there were no material changes in assumptions and methodologies in the new model and the
implementation did not have a material impact on the allowance for loan losses, the implementation process triggered
a re-evaluation of the time period of forecasted loan losses included in the general allowance. Based on reviews of
recent loan performance, current economic conditions and their impact on borrower behavior and the timing of default
in the new model, the Company extended the loss emergence period from 12 months to 18 months for both portfolios.
The extended emergence period resulted in approximately $40 million of additional allowance for loan losses as of
December 31, 2015. The new loss forecasting model continues to be sensitive to key risk factors within the one- to
four-family and home equity loan portfolios, which include but are not limited to loan type, delinquency history, LTV/
CLTV ratio and borrowers’ credit scores and the forecasted loan losses are estimated based on these types of loan-level
attributes. The Company utilizes historical mortgage loan performance data to develop the forecast of delinquency and
default for these risk segments.
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During the year ended December 31, 2015, the Company also made the following enhancements to its
quantitative allowance methodology for identifying higher risk loans in one- to four-family and home equity loan
portfolios due to newly available performance information. These enhancements resulted in approximately $45 million
of additional allowance for loan losses as of December 31, 2015:
• The Company extended the period of our forecasted loan losses captured within the general allowance to
include the total probable loss over the remaining life on a subset of higher risk interest-only loans in the
one- to four-family loan portfolio.
• The Company further refined the criteria utilized in identifying higher risk home equity lines of credit for
which the total probable loss over the remaining life is included within the general allowance.
The general allowance for loan losses also included a qualitative component to account for a variety of factors
that present additional uncertainty that may not be fully considered in the quantitative loss model but are factors the
Company believes may impact the level of credit losses. The Company utilizes a qualitative factor framework
whereby, on a quarterly basis, management assesses the risk associated with three primary sets of factors: external
factors, internal factors, and portfolio specific factors. The uncertainty related to these factors may expand over time,
temporarily increasing the qualitative component in advance of the more precise identification of these probable losses
being captured within the quantitative component of the general allowance. The total qualitative component was $13
million and $37 million as of December 31, 2015 and 2014, respectively.
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 depreciated over
the lesser of their estimated useful lives or lease terms. 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. Completed projects are carried at cost and are amortized on a
straight-line basis over their estimated useful lives of four years.
Goodwill and Other Intangibles, Net—Goodwill is acquired through business combinations and represents
the excess of the purchase price over the fair value of net tangible assets and identifiable intangible assets. The
Company evaluates goodwill for impairment on an annual basis as of November 30 and in interim periods when
events or changes indicate the carrying value may not be recoverable. The Company has the option of performing a
qualitative assessment of goodwill for any of its reporting units to determine whether it is more likely than not that the
fair value is less than the carrying value of a reporting unit. If it is more likely than not that the fair value exceeds the
carrying value of the reporting unit, then no further testing is necessary; otherwise, the Company must perform a two-
step quantitative assessment of goodwill. The Company may elect to bypass the qualitative assessment and proceed
directly to performing a two-step quantitative assessment.
The Company currently does not have any intangible assets with indefinite lives other than goodwill. The
Company evaluates intangible assets with finite lives for impairment on an annual basis or when events or changes
indicate the carrying value may not be recoverable. The Company also 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.
For additional information on goodwill and other intangibles, net, see Note 9—Goodwill and Other
Intangibles, Net.
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 represents real estate acquired through
foreclosure and also includes those properties acquired through a deed in lieu of foreclosure or similar legal
agreement. Both real estate owned and repossessed assets are carried at the lower of carrying value or fair value, less
estimated selling costs.
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Equity Method, Cost Method and Other Investments—The Company’s equity method, cost method and other
investments are generally limited liability investments in partnerships, companies and other similar entities, including
tax credit partnerships and community development entities, that are not required to be consolidated. These
investments are reported in the other assets line item in the consolidated balance sheet. Under the equity method, the
Company recognizes its share of the investee’s net income or loss in the other income (expense) line item in the
consolidated statement of income. The Company’s other investments include those accounted for using the
proportional amortization method. Additionally, the Company recognizes a liability for all legally binding unfunded
equity commitments to the investees in the other liabilities line item in the consolidated balance sheet.
The Company evaluates its equity and cost method investments for impairment when events or changes
indicate the carrying value may not be recoverable. If the impairment is determined to be other-than-temporary, the
Company will recognize an impairment loss in the other income (expense) line item equal to the difference between
the expected realizable value and the carrying value of the investment.
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. As a condition of its membership in the FHLB, the Company is
required to maintain a FHLB stock investment which was $15 million at December 31, 2015. The Company accounts
for its investment in FHLB stock as a cost method investment. FHLB advances, included in the other borrowings line
item, is a wholesale funding source of E*TRADE Bank.
Income Taxes—Deferred income taxes are recorded when revenues and expenses are recognized in different
periods for financial statement purposes than for tax 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 for deferred tax
assets are established if it is determined, based on evaluation of available evidence at the time the determination is
made, that it is more likely than not that some or all of the deferred tax assets 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 it is more likely than not that the uncertain tax position will be sustained upon
examination. For uncertain tax positions, a 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.
Customer Payables—Customer payables 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.
Other Borrowings—Other borrowings includes securities sold under agreements to repurchase, FHLB
advances, borrowings from E*TRADE Clearing's lines of credit and TRUPs. 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.
Comprehensive Income (Loss)—The Company’s comprehensive income (loss) is composed of net income,
noncredit portion of OTTI on debt securities, unrealized gains (losses) on available-for-sale securities, the effective
portion of the unrealized gains (losses) on derivatives in cash flow hedge relationships and foreign currency translation
gains, 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
instrument 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.
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Accounting for derivatives differs significantly depending on whether a derivative is designated as a hedge
based on the applicable accounting guidance 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. In order to
qualify for hedge accounting, 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 measured on a quarterly basis and is included in the gains (losses) on securities
and other line item in the consolidated statement of income. 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 (losses) on securities and other line item in the
consolidated statement of income. For additional information on derivative instruments and hedging activities, see
Note 7—Accounting for Derivative Instruments and Hedging Activities.
Fair Value—Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The Company determines 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 from securities lending activities. 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 from securities lending activities 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 from the Company’s customers and are impacted by both trade type
and trade mix. Commissions from securities transactions are recognized on a trade-date basis.
Fees and Service Charges—Fees and service charges consist of order flow revenue, mutual fund service fees,
advisor management fees, foreign exchange revenue, reorganization fees and other fees and service charges. Fees and
service charges also includes revenue earned on customer assets held by third parties.
Principal Transactions—Principal transactions consisted of revenue from market making activities. The
Company completed the sale of its market making business on February 10, 2014 and therefore no longer records
revenue from principal transactions. The sale of the market making business resulted in a gain of $4 million which was
recorded in the restructuring and other exit activities line item on the consolidated statement of income.
Gains (Losses) on Securities and Other—Gains (losses) on securities and other includes the reclassification
of deferred losses on cash flow hedges; gains or losses resulting from the sale of available-for-sale 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.
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
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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).
The Company considers OTTI for an available-for-sale equity security to have occurred if the decline in the
security’s fair value below its cost basis is deemed other than temporary based on evaluation of both qualitative and
quantitative valuation measures. If the impairment of an available-for-sale equity security is determined to be other-
than-temporary, 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 intends to sell an impaired equity security and the
Company does not expect to recover the entire cost basis of the security prior to the sale, the Company will recognize
OTTI in the period the decision to sell is made.
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
compensation plans, which are recognized in accordance with 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 2015, the Company adopted and the shareholders approved the 2015 Omnibus
Incentive Plan ("2015 Plan"), which replaced the 2005 Stock Incentive Plan ("2005 Plan"). The 2015 Plan provides the
Company the ability to grant equity awards to officers, directors, employees and consultants, including, but not limited
to, nonqualified or incentive stock options, restricted stock awards and restricted stock units at a price determined by
the Board on 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.
Through 2011, the Company issued options to directors and to certain of the Company's officers and
employees. Options generally vest ratably over a two- to four-year period from the date of grant and expire within
seven to ten years from the date of grant. Certain options provide for accelerated vesting upon a change of control.
Exercise prices are equal to the fair value of the shares on the grant date. As of December 31, 2015, there were 0.3
million options outstanding and no unrecognized compensation expense related to non-vested stock options.
The Company issues restricted stock awards and deferred restricted stock units to directors and restricted
stock units to certain of the Company's officers and employees. Each restricted stock unit can be converted into one
share of the Company’s common stock upon vesting. These shares of restricted stock and restricted stock units are
issued at the fair value on the date of grant and vest ratably over the requisite service period, generally one to four
years. Beginning in 2015, the Company also issued performance share units to certain of the Company’s officers. Each
performance share unit can be converted into one share of the Company’s common stock upon vesting. Vesting of
performance share units is contingent upon achievement of certain predefined individual and Company performance
targets over the performance period. These performance share units are issued at the fair value on the date of grant and
vest on a graded basis over the requisite service period, which is one to two years.
As of December 31, 2015, there were 3.1 million restricted stock awards and units outstanding and $25
million of total unrecognized compensation expense related to non-vested restricted stock awards. This cost is
expected to be recognized over a weighted-average period of 1.1 years. As of December 31, 2015, there were also 0.1
million performance share units outstanding. The total fair value of restricted stock awards, restricted stock units and
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performance share units vested was $28 million, $34 million and $19 million for the years ended December 31, 2015,
2014 and 2013, respectively.
The Company recognized $34 million, $24 million and $20 million in compensation expense for its options,
restricted stock awards, restricted stock units and performance share units for the years ended December 31, 2015,
2014 and 2013, respectively.
Under the 2015 Plan, the remaining unissued authorized shares of the 2005 Plan that are not subject to
outstanding awards thereunder were authorized for issuance. Additionally, any shares that had been awarded but
remained unissued under the 2005 Plan that were subsequently canceled, forfeited, or reacquired by the Company
would be authorized for issuance under the 2015 Plan. As of December 31, 2015, 12.2 million shares were available
for grant under the 2015 Plan.
The Company records share-based compensation expense in accordance with the stock compensation
accounting guidance. The Company recognizes compensation expense at the grant date fair value of a share-based
payment award over the requisite service period less estimated forfeitures. Compensation expense for performance
share units is also adjusted based on the Company’s estimated outcome of meeting the performance conditions. Share-
based compensation 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.
Earnings Per Share—Basic earnings per share is computed by dividing net income by the weighted-average
common shares outstanding for the period. Diluted earnings 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 per share stock options, unvested restricted stock awards and units,
unvested performance share 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.
Adoption of New Accounting Standards
Accounting for Investments in Qualified Affordable Housing Projects
In January 2014, the FASB amended the accounting guidance for investments in qualified affordable housing
projects. The amended accounting guidance permits reporting entities to make an accounting policy election to account
for their investments in qualified affordable housing projects using the proportional amortization method if certain
conditions are met. Under the proportional amortization method, the initial cost of the investment is amortized in
proportion to the tax credits and other tax benefits received and the net investment performance is recognized in the
consolidated statement of income as a component of income tax expense. The Company adopted the amended
accounting guidance for its qualifying investments on a full retrospective basis for annual and interim periods
beginning on January 1, 2015. The adoption of the amended guidance did not have a material impact on the
Company’s financial condition, results of operations or cash flows for the periods presented. For the year ended
December 31, 2015, $5 million of amortization and $4 million of tax credits associated with these
investments were recognized as income tax expense in the consolidated statement of income. As of December 31,
2015, the carrying value of these investments was $35 million and is included within other assets in the consolidated
balance sheet.
Presentation and Disclosure of Discontinued Operations
In April 2014, the FASB amended the presentation and disclosure guidance on disposal transactions. The
amended guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new
disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued
operation. The amended guidance became effective for all disposals or classifications as held for sale occurring in
annual and interim periods beginning on January 1, 2015 for the Company. The adoption of the amended guidance did
not have a material impact on the Company’s financial condition, results of operations or cash flows.
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Accounting and Disclosures for Repurchase Agreements
In June 2014, the FASB amended the accounting and disclosure guidance on repurchase agreements. The
amended guidance requires entities to account for repurchase-to-maturity transactions as secured borrowings,
eliminates accounting guidance on linked repurchase financing transactions, and expands the disclosure requirements
related to transfers of financial assets accounted for as sales and as secured borrowings. The amended accounting
guidance and the amended disclosure guidance for transfers of financial assets accounted for as sales became effective
for annual and interim periods beginning on January 1, 2015 for the Company and was applied using a cumulative-
effect approach as of that date. The adoption of this amended guidance did not have a material impact on the
Company’s financial condition, results of operations or cash flows. The amended disclosure guidance for transfers of
financial assets accounted for as secured borrowings became effective for annual periods beginning on January 1, 2015
and interim periods beginning on April 1, 2015 for the Company. The Company's disclosures in Note 4—Offsetting
Assets and Liabilities reflect the adoption of this amended disclosure guidance.
Classification of Government-Guaranteed Mortgage Loans upon Foreclosure
In August 2014, the FASB amended the accounting and disclosure guidance related to the classification of
certain government-guaranteed mortgage loans upon foreclosure. The amended guidance requires entities to
derecognize a mortgage loan and recognize a separate other receivable upon foreclosure if certain conditions are met.
The separate other receivable is recorded based on the amount of principal and interest expected to be recovered under
the guarantee. The amended guidance became effective for annual and interim periods beginning on January 1, 2015
for the Company and was applied on a modified retrospective basis to qualifying loans at that date. The adoption of the
amended guidance did not have a material impact on the Company’s financial condition, results of operations or cash
flows.
Presentation of Debt Issuance Costs
In April 2015, the FASB amended the presentation guidance on debt issuance costs. The amended
presentation guidance requires that debt issuance costs be presented in an entity’s balance sheet as a direct deduction
from the related debt liability rather than as an asset. In August 2015, the FASB issued additional guidance clarifying
that debt issuance costs related to line-of-credit arrangements may be presented as an asset in an entity’s balance sheet,
regardless of whether there are any outstanding borrowings on the arrangement. As this guidance is consistent with the
Company's historical presentation of debt issuance costs, the Company's adoption of the amended guidance as of
January 1, 2015 did not impact the Company’s financial condition, results of operations or cash flows.
New Accounting Standards Not Yet Adopted
Revenue Recognition on Contracts with Customers
In May 2014, the FASB amended the guidance on revenue recognition on contracts with customers. The new
standard outlines a single comprehensive model for entities to apply in accounting for revenue arising from contracts
with customers. The amended guidance will be effective for annual and interim periods beginning on January 1, 2018
for the Company and may be applied on either a full retrospective or modified retrospective basis. Early adoption is
permitted. While the Company is currently evaluating the impact of the new accounting guidance, the adoption of the
amended guidance is not expected to have a material impact on the Company’s financial condition, results of
operations or cash flows.
Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the FASB amended the guidance related to an entity’s evaluations and disclosures of going
concern uncertainties. The new guidance requires management to perform interim and annual assessments of the
entity’s ability to continue as a going concern within one year of the date the financial statements are issued, and to
provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a
going concern. The amended guidance became effective for the Company for annual periods beginning on January 1,
2016 and will be effective for interim periods beginning on January 1, 2017. Early adoption is permitted. The adoption
of the amended guidance will not impact the Company’s financial condition, results of operations or cash flows.
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Consolidation
In February 2015, the FASB amended the guidance on consolidation of certain legal entities. The amended
guidance modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest
entities, eliminates the presumption that a general partner should consolidate a limited partnership, and clarifies how to
determine whether a group of equity holders has power over an entity. The amended guidance became effective for
annual and interim periods beginning on January 1, 2016 for the Company and may be applied on either a full
retrospective or modified retrospective basis. The adoption of the amended guidance will not have a material impact
on the Company’s financial condition, results of operations or cash flows.
Accounting for Customer Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB amended the accounting guidance on customer fees paid in a cloud computing
arrangement. The amended guidance requires that internal-use software accessed by a customer in a cloud computing
arrangement be accounted for as a software license if specific criteria are met; otherwise they should be accounted for
as service contracts. The amended guidance became effective for annual and interim periods beginning on January 1,
2016 for the Company and may be applied on either a full retrospective or prospective basis. The adoption of the
amended guidance will not have a material impact on the Company’s financial condition, results of operations or cash
flows.
Classification and Measurement of Financial Instruments
In January 2016, the FASB amended the accounting and disclosure guidance on the classification and
measurement of financial instruments. Relevant changes in the amended guidance include the requirement that equity
investments, excluding those accounted for under the equity method of accounting or those resulting in consolidation
of the investee, be measured at fair value in the consolidated balance sheet with changes in fair value recognized in net
income. For disclosure purposes, the Company will no longer be required to disclose the methods and significant
assumptions used to estimate fair value for financial instruments measured at amortized cost in the consolidated
balance sheet. The amended guidance will be effective for interim and annual periods beginning on January 1, 2018
for the Company and is required to be applied on a modified retrospective basis by means of a cumulative-effect
adjustment to the consolidated balance sheet on that date. While the Company is currently evaluating the impact of the
new accounting guidance, the adoption of the amended guidance is not expected to have a material impact on the
Company’s financial condition, results of operations or cash flows.
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NOTE 2—OPERATING INTEREST INCOME AND OPERATING INTEREST EXPENSE
The following table shows the components of operating interest income and operating interest expense
(dollars in millions):
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(2)
FHLB advances and other borrowings(2)
Deposits
Customer payables and other
Total operating interest expense(3)
Net operating interest income
Year Ended December 31,
2015
2014
2013
$
$
230
244
346
276
119
1,215
(69)
(48)
(4)
(8)
(129)
1,086
$
$
297
288
328
264
102
1,279
(123)
(65)
(8)
(9)
(205)
1,074
$
$
395
279
255
224
54
1,207
(148)
(68)
(13)
(9)
(238)
969
(1) Operating interest income reflects $(42) million, $(31) million, and $(16) million of expense on hedges that qualify for hedge accounting for
the years ended December 31, 2015, 2014, and 2013, respectively.
(2) The Company terminated $4.4 billion of repurchase agreements and FHLB advances in 2015. See Note 12—Other Borrowings for
additional information.
(3) Operating interest expense reflects $(74) million, $(132) million, and $(153) million of expense on hedges that qualify for hedge accounting
for the years ended December 31, 2015, 2014, and 2013, 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
the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. Fair value is a market-based measure considered from the perspective of a market participant. Accordingly,
even when market assumptions are not readily available, the Company’s own assumptions reflect those that market
participants would use in pricing the asset or liability at the measurement date. The fair value measurement accounting
guidance describes the following three levels used to classify fair value measurements:
•
•
•
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that are
accessible by the Company.
Level 2—Quoted prices in markets that are not active or for which all significant inputs are
observable, either directly or indirectly.
Level 3—Unobservable inputs that are significant to the fair value of the assets or liabilities.
The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the
significance of a particular input to a fair value measurement requires judgment and consideration of factors specific to
the asset or liability.
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Recurring Fair Value Measurement Techniques
Mortgage-backed Securities
The Company’s mortgage-backed securities portfolio primarily comprised agency mortgage-backed securities
and CMOs. Agency mortgage-backed securities and CMOs are guaranteed by U.S. government sponsored enterprises
and federal agencies. The weighted average coupon rates for the available-for-sale mortgage-backed securities at
December 31, 2015 are shown in the following table:
Agency mortgage-backed securities
Agency CMOs
Weighted Average
Coupon Rate
2.85%
2.73%
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.
Other Debt Securities
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.
The Company's fair value level classification of U.S. Treasuries is based on the original maturity dates of the
securities and whether the securities are the most recent issuances of a given maturity. U.S. Treasuries with original
maturities less than one year are classified as Level 1. U.S. Treasuries with original maturities longer than one year are
classified as Level 1 if they represent the most recent issuance of a given maturity; otherwise, these securities are
classified as Level 2.
The fair value measurements of agency debt securities were determined using market and income approaches
along with the Company’s own trading activities for identical or similar instruments and were categorized in Level 2
of the fair value hierarchy.
The Company’s municipal bonds are revenue bonds issued by state and other local government agencies. The
valuation of corporate bonds is impacted by the credit worthiness of the corporate issuer. All of the Company’s
municipal bonds and corporate bonds were rated investment grade at December 31, 2015. These securities were valued
using a market approach with pricing service valuations corroborated by recent market transactions for identical or
similar bonds. Municipal bonds and corporate bonds were categorized in Level 2 of the fair value hierarchy.
Publicly Traded Equity Securities
The fair value measurements of the Company's publicly traded equity securities were classified as Level 1 of
the fair value hierarchy as they were based on quoted market prices in active markets.
Derivative Instruments
Interest rate swap and option contracts were valued with an income approach using pricing models that are
commonly used by the financial services industry. The market observable inputs used in the pricing models include the
swap curve, the volatility surface, and prime or overnight indexed swap basis from a financial data provider. The
Company does not consider these models to involve significant judgment on the part of management, and the
Company corroborated the fair value measurements with counterparty valuations. The Company’s derivative
instruments were categorized in Level 2 of the fair value hierarchy. The consideration of credit risk, the Company’s or
the counterparty’s, did not result in an adjustment to the valuation of its derivative instruments in the periods
presented.
Nonrecurring Fair Value Measurement Techniques
Certain other assets are recorded at fair value on a nonrecurring basis: 1) one- to four-family and home equity
loans in which the amount of the loan balance in excess of the estimated current value of the underlying property less
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estimated selling costs has been charged-off; and 2) real estate owned that is carried at the lower of the property’s
carrying value or fair value less estimated selling costs.
The Company evaluates and reviews assets that have been subject to fair value measurement requirements on
a quarterly basis in accordance with policies and procedures that were designed to be in compliance with guidance
from the Company’s regulators. These policies and procedures govern the frequency of the review, the use of
acceptable valuation methods, and the consideration of estimated selling costs.
Loans Receivable
Loans that have been delinquent for 180 days or that are in bankruptcy and certain TDR loan modifications
are charged-off based on the estimated current value of the underlying property less estimated selling costs. Property
valuations for these one- to four-family and home equity loans are based on the most recent "as is" property valuation
data available, which may include appraisals, broker price opinions ("BPOs"), automated valuation models or updated
values using home price indices. Subsequent to the recording of an initial fair value measurement, these loans continue
to be measured at fair value on a nonrecurring basis, utilizing the estimated value of the underlying property less
estimated selling costs. These property valuations are updated on a monthly, quarterly or semi-annual basis depending
on the type of valuation initially used. If the value of the underlying property has declined, an additional charge-off is
recorded. If the value of the underlying property has increased, previously charged-off amounts are not reversed. If the
valuation data obtained is significantly different from the valuation previously received, the Company reviews
additional property valuation data to corroborate or update the valuation.
BPOs are a type of valuation input used to determine the estimated property values of our collateral
dependent mortgage loans. In addition, when available, BPOs are used in various loss mitigation, default management
and portfolio monitoring efforts, allowance for loan losses modeling and CLTV estimates. The Company validates
BPOs through quality control measures, including comparison to tax records, comparable sale and listing data, prior
BPO values and original appraisals. The Company does not adjust BPO values but will only utilize BPOs that pass
validation.
Real Estate Owned
Property valuations for real estate owned are based on the lowest value of the most recent property valuation
data available, which may include appraisals, listing prices or approved offer prices.
Nonrecurring fair value measurements on one- to four-family and home equity loans and real estate owned
were classified as Level 3 of the fair value hierarchy as the valuations included unobservable inputs that were
significant to the fair value. The following table presents additional information about significant unobservable inputs
used in the valuation of assets measured at fair value on a nonrecurring basis that were categorized in Level 3 of the
fair value hierarchy at December 31, 2015 and 2014:
Unobservable Inputs
Average
Range
December 31, 2015
Loans receivable:
One- to four-family
Home equity
Real estate owned
December 31, 2014
Loans receivable:
One- to four-family
Home equity
Real estate owned
Appraised value
Appraised value
Appraised value
Appraised value
Appraised value
Appraised value
$
$
$
$
$
$
422,900
274,100
330,700
$8,500-$1,900,000
$9,000-$1,300,000
$26,500-$1,250,000
378,700
280,400
342,800
$37,000-$1,800,000
$9,000-$1,190,000
$5,000-$1,950,000
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Recurring and Nonrecurring Fair Value Measurements
Assets and liabilities measured at fair value at December 31, 2015 and 2014 are summarized in the following
tables (dollars in millions):
Level 1
Level 2
Level 3
Total
Fair Value
December 31, 2015:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities and CMOs
$
— $
11,763
$
— $
11,763
Agency debentures
U.S. Treasuries
Agency debt securities
Municipal bonds
Corporate bonds
Total debt securities
Publicly traded equity 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)
Total liabilities measured at fair value on a recurring
basis(2)
Nonrecurring fair value measurements:
Loans receivable:
One- to four-family
Home equity
Total loans receivable
Real estate owned
—
—
—
—
—
—
32
32
—
557
143
55
35
4
12,557
—
12,557
10
32
$
12,567
— $
— $
55
55
$
$
$
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
557
143
55
35
4
12,557
32
12,589
10
— $
12,599
— $
— $
$
41
22
63
26
55
55
41
22
63
26
$
$
$
$
Total assets measured at fair value on a nonrecurring
basis(3)
$
— $
— $
89
$
89
(1) All derivative assets and liabilities were interest rate contracts at December 31, 2015. Information related to derivative instruments is
detailed in Note 7—Accounting for Derivative Instruments and Hedging Activities.
(2) Assets and liabilities measured at fair value on a recurring basis represented 28% and less than 1% of the Company’s total assets and total
liabilities, respectively, at December 31, 2015.
(3) Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at
December 31, 2015, and for which a fair value measurement was recorded during the period.
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December 31, 2014:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Debt securities:
Level 1
Level 2
Level 3
Total
Fair Value
Agency mortgage-backed securities and CMOs
$
— $
11,164
$
— $
11,164
Agency debentures
Agency debt securities
Municipal bonds
Corporate bonds
Total debt securities
Publicly traded equity 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)
Total liabilities measured at fair value on a recurring
basis(2)
Nonrecurring fair value measurements:
Loans receivable:
One- to four-family
Home equity
Total loans receivable
Real estate owned
—
—
—
—
—
33
33
—
648
499
40
4
12,355
—
12,355
24
33
$
12,379
— $
— $
66
66
$
$
$
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
648
499
40
4
12,355
33
12,388
24
— $
12,412
— $
— $
$
46
32
78
38
66
66
46
32
78
38
$
$
$
$
Total assets measured at fair value on a nonrecurring
basis(3)
$
— $
— $
116
$
116
(1) All derivative assets and liabilities were interest rate contracts at December 31, 2014. Information related to derivative instruments is
detailed in Note 7—Accounting for Derivative Instruments and Hedging Activities.
(2) Assets and liabilities measured at fair value on a recurring basis represented 27% and less than 1% of the Company’s total assets and total
liabilities, respectively, at December 31, 2014.
(3) Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at
December 31, 2014, and for which a fair value measurement was recorded during the period.
The following table presents the gains and losses associated with the assets measured at fair value on a
nonrecurring basis during the years ended December 31, 2015, 2014 and 2013 (dollars in millions):
One- to four-family
Home equity
Total losses on loans receivable measured at fair value
Losses (gains) on real estate owned measured at fair value
Losses on goodwill measured at fair value
2015
December 31,
2014
2013
$
$
$
$
$
7
14
$
21
— $
— $
$
10
30
40
$
(2) $
— $
40
58
98
(1)
142
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Transfers Between Levels 1 and 2
For assets and liabilities measured at fair value on a recurring basis, the Company’s transfers between levels
of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period on a quarterly basis.
The Company had no transfers between Level 1 and 2 during the years ended December 31, 2015 and 2014.
Recurring Fair Value Measurements Categorized within Level 3
At both December 31, 2015 and 2014, no assets or liabilities measured at fair value on a recurring basis were
categorized within Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments Not Carried at Fair Value
The following table summarizes the carrying values, fair values and fair value hierarchy level classification of
financial instruments that are not carried at fair value on the consolidated balance sheet at December 31, 2015 and
December 31, 2014 (dollars in millions):
Assets
Cash and equivalents
Cash required to be segregated under federal or
other regulations
Held-to-maturity securities:
Carrying
Value
$
$
2,233
1,057
Agency mortgage-backed securities and CMOs
$ 10,353
Agency debentures
Agency debt securities
Other non-agency debt securities
127
2,523
10
Total held-to-maturity securities
$ 13,013
Receivables from brokers, dealers and clearing
organizations
Margin receivables
Loans receivable, net:
One- to four-family
Home equity
Consumer and other
Total loans receivable, net(1)
Liabilities
Deposits
Payables to brokers, dealers and clearing
organizations
Customer payables
Other borrowings:
Securities sold under agreements to repurchase
Trust preferred securities
Total other borrowings
Corporate debt
$
$
$
520
7,398
2,465
1,810
338
$
4,613
$ 29,445
$
$
$
$
$
$
1,576
6,544
82
409
491
997
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
December 31, 2015
Level 1
Level 2
Level 3
Total
Fair Value
2,233
1,057
$
$
— $
— $
2,233
— $
— $
1,057
— $ 10,444
$
— $ 10,444
—
—
—
125
2,544
—
— $ 13,113
— $
520
— $
7,398
$
$
$
—
—
10
10
125
2,544
10
$ 13,123
— $
520
— $
7,398
— $
— $
2,409
$
2,409
—
—
—
—
1,660
343
1,660
343
— $
— $
4,412
$
4,412
— $ 29,444
— $
1,576
— $
6,544
— $
— $
— $
82
82
— $
— $
1,055
$
$
$
$
$
$
— $ 29,444
— $
1,576
— $
6,544
— $
252
252
$
$
82
252
334
— $
1,055
(1) The carrying value of loans receivable, net includes the allowance for loan losses of $353 million and loans that are valued at fair value on a
nonrecurring basis at December 31, 2015.
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December 31, 2014
Carrying
Value
Level 1
Level 2
Level 3
Total
Fair Value
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
Other non-agency debt securities
$
$
$
1,783
555
9,793
164
2,281
10
Total held-to-maturity securities
$ 12,248
Receivables from brokers, dealers and clearing
organizations
Margin receivables
Loans receivable, net:
One- to four-family
Home equity
Consumer and other
Total loans receivable, net(1)
Liabilities
Deposits
Payables to brokers, dealers and clearing
organizations
Customer payables
Other borrowings:
Securities sold under agreements to repurchase
FHLB advances and trust preferred securities
Total other borrowings
Corporate debt
$
$
$
884
7,675
3,053
2,475
451
$
5,979
$ 24,890
$
$
$
$
$
$
1,699
6,455
3,672
1,299
4,971
1,366
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,783
555
$
$
— $
— $
1,783
— $
— $
555
— $
9,971
$
— $
9,971
—
—
—
166
2,329
—
— $ 12,466
— $
884
— $
7,675
$
$
$
—
—
10
10
166
2,329
10
$ 12,476
— $
884
— $
7,675
— $
— $
2,742
$
2,742
—
—
—
—
2,274
449
2,274
449
— $
— $
5,465
$
5,465
— $ 24,890
— $
1,699
— $
6,455
— $
3,681
— $
922
— $
4,603
— $
1,491
$
$
$
$
$
$
$
— $ 24,890
— $
1,699
— $
6,455
— $
3,681
252
252
$
$
1,174
4,855
— $
1,491
(1) The carrying value of loans receivable, net includes the allowance for loan losses of $404 million and loans that are valued at fair value on a
nonrecurring basis at December 31, 2014.
The fair value measurement techniques for financial instruments not carried at fair value on the consolidated
balance sheet at December 31, 2015 and 2014 are summarized as follows:
Cash and equivalents, cash required to be segregated under federal or other regulations, receivables from
brokers, dealers and clearing organizations, margin receivables, payables to brokers, dealers and clearing
organizations and customer payables—Due to their short term nature, fair value is estimated to be carrying value.
Held-to-maturity securities—The held-to-maturity securities portfolio included agency mortgage-backed
securities and CMOs, agency debentures, agency debt securities, and other non-agency debt securities. The fair value
of agency mortgage-backed securities is determined using market and income approaches with quoted market prices,
recent market transactions and spread data for similar instruments. The fair value of agency CMOs and agency debt
securities is determined using market and income approaches with the Company’s own trading activities for identical
or similar instruments. The fair value of agency debentures is based on quoted market prices that were derived from
assumptions observable in the marketplace. Fair value of other non-agency debt securities is estimated to be carrying
value.
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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.
Although the market for one- to four-family and home equity loan portfolios has improved, given the lack of
observability of valuation inputs, these fair value measurements cannot be determined with precision and changes in
the underlying assumptions used, including discount rates, could significantly affect the results of current or future fair
value estimates. In addition, the amount that would be realized in a forced liquidation, an actual sale or immediate
settlement could be 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, 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 and FHLB advances—Fair value for securities sold under
agreements to repurchases and FHLB advances was determined by discounting future cash flows using discount
factors derived from current observable rates implied for other similar instruments with similar remaining maturities at
December 31, 2015 and 2014. The Company terminated its repurchase agreements and FHLB advances during 2015.
See Note 12—Other Borrowings for additional information.
Trust preferred securities—For subordinated debentures, fair value is estimated by discounting future cash
flows at the yield implied by dealer pricing quotes.
Corporate debt—For interest-bearing corporate debt, fair value is estimated using dealer pricing quotes. The
fair value of the non-interest-bearing convertible debentures is directly correlated to the intrinsic value of the
Company’s underlying stock; therefore, as the price of the Company’s stock increases relative to the conversion price,
the fair value of the convertible debentures increases.
Fair Value of Commitments and Contingencies
In the normal course of business, the Company makes various commitments to extend credit and incur
contingent liabilities that are not reflected in the consolidated balance sheet. Changes in the economy or interest rates
may influence the impact that these commitments and contingencies have on the Company in the future. The Company
does not estimate the fair value of those commitments. The Company has the right to cancel these commitments in
certain circumstances and has closed a significant amount of customer home equity lines of credit in the past eight
years. At December 31, 2015, the Company had $70 million 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—OFFSETTING ASSETS AND LIABILITIES
For financial statement purposes, the Company does not offset derivative instruments, repurchase agreements,
or securities borrowing and securities lending transactions. These activities are generally transacted under master
agreements that are widely used by counterparties and that may allow for net settlements of payments in the normal
course, as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of
the two parties to the transaction. The following table presents information about these transactions to enable the users
of the Company’s financial statements to evaluate the potential effect of rights of setoff between these recognized
assets and recognized liabilities at December 31, 2015 and 2014 (dollars in millions):
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Gross Amounts Not Offset in
the Consolidated Balance Sheet
Gross
Amounts of
Recognized
Assets and
Liabilities
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
Net Amounts
Presented in the
Consolidated
Balance Sheet
Financial
Instruments
Collateral
Received or
Pledged
(Including
Cash)
Net
Amount
December 31, 2015
Assets:
Deposits paid for securities
borrowed (1)(5)
Total
$
$
Liabilities:
Deposits received for
securities loaned (2)(6)
Repurchase agreements (2)(4)
Derivative liabilities (2)(3)
120
120
$
$
— $
— $
120
120
$
$
(94) $
(94) $
(18) $
(18) $
8
8
1,535
82
11
—
—
—
1,535
82
11
(94)
—
—
(94) $
(1,314)
(81)
(11)
(1,406) $
127
1
—
128
Total
$
1,628
$
— $
1,628
$
December 31, 2014
Assets:
Deposits paid for securities
borrowed (1)(5)
Derivative assets (1)(3)
Total
Liabilities:
$
$
474
24
498
$
$
— $
—
— $
474
24
498
$
$
(188) $
(15)
(203) $
(267) $
(3)
(270) $
19
6
25
Deposits received for
securities loaned (2)(6)
Repurchase agreements (2)(4)
Derivative liabilities (2)(3)
1,649
3,672
30
—
—
—
1,649
3,672
30
Total
$
5,351
$
— $
5,351
$
(188)
—
(15)
(203) $
(1,332)
(3,671)
(15)
(5,018) $
129
1
—
130
(1) Net amount of deposits paid for securities borrowed and derivative assets presented in the consolidated balance sheet are reflected in the
receivables from brokers, dealers and clearing organizations and other assets line items, respectively.
(2) Net amount of deposits received for securities loaned, repurchase agreements and derivative liabilities presented in the consolidated balance
sheet are reflected in the payables to brokers, dealers and clearing organizations, other borrowings and other liabilities line items,
respectively.
(3) Excludes net accrued interest payable of $3 million and $7 million at December 31, 2015 and 2014, respectively.
(4) The Company pledges available-for-sale and held-to-maturity securities as collateral for amounts due on repurchase agreements and
(5)
(6)
derivative liabilities. The collateral pledged included available-for-sale securities at fair value for December 31, 2015 and available-for-sale
securities at fair value and held-to-maturity securities at amortized cost for December 31, 2014.
Included in the gross amounts of deposits paid for securities borrowed was $34 million and $278 million at December 31, 2015 and 2014,
respectively, transacted through a program with a clearing organization, which guarantees the return of cash to the Company. For
presentation purposes, these amounts presented are based on the counterparties under the Company’s master securities loan agreements.
Included in the gross amounts of deposits received for securities loaned was $722 million and $1.1 billion at December 31, 2015 and 2014,
respectively, transacted through a program with a clearing organization, which guarantees the return of securities to the Company. For
presentation purposes, these amounts presented are based on the counterparties under the Company’s master securities loan agreements.
Certain types of derivatives that the Company trades are subject to derivatives clearing agreements ("cleared
derivatives contracts") under the Dodd-Frank Act. These cleared derivatives contracts enable clearing by a derivatives
clearing organization through a clearing member. Under the contracts, the clearing member typically has a one-way
right to offset all contracts in the event of the Company’s default or bankruptcy. As such, the cleared derivatives
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contracts are not bilateral master netting agreements and do not allow for offsetting. At December 31, 2015 and 2014,
the Company had $10 million and $0, respectively, in derivative assets of cleared derivatives contracts and $44 million
and $36 million, respectively, in derivative liabilities of cleared derivatives contracts.
Securities Lending Transactions
The Company lends customer equity securities to other broker-dealers in connection with its securities
lending activities and receives cash as collateral for the securities loaned. The Company records deposits received for
securities loaned in payables to brokers, dealers and clearing organizations on the consolidated balance sheet. At
December 31, 2015, the Company recorded a gross obligation of $1.5 billion as deposits received for securities loaned
on its consolidated balance sheet. Securities lending transactions have overnight or continuous remaining contractual
maturities.
Securities lending transactions expose the Company to counterparty credit risk and market risk associated
with the securities loaned under these transactions. To manage the counterparty risk, the Company maintains internal
standards for approving counterparties, reviews and analyzes the credit rating of each counterparty, and monitors its
positions with each counterparty on an ongoing basis. In addition, for certain of the Company's securities lending
transactions, the Company uses a program with a clearing organization that guarantees the return of securities to the
Company. The Company manages its exposure to market risk associated with the securities loaned under these
transactions by using collateral arrangements that require additional collateral to be obtained from or excess collateral
to be returned to the counterparties based on changes in market value, to maintain specified collateral levels.
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NOTE 5—AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
The amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2015
and 2014 are shown in the following tables (dollars in millions):
Amortized
Cost
Gross
Unrealized /
Unrecognized
Gains
Gross
Unrealized /
Unrecognized
Losses
Fair Value
December 31, 2015:
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities and CMOs
$
11,888
$
Agency debentures
U.S. Treasuries
Agency debt securities
Municipal bonds
Corporate bonds
Total debt securities
Publicly traded equity securities(1)
Total available-for-sale securities
Held-to-maturity securities:
Agency residential mortgage-backed securities and
CMOs
Agency debentures
Agency debt securities
Other non-agency debt securities
$
$
551
147
55
35
5
12,681
33
12,714
$
41
18
—
—
—
—
59
—
59
$
$
10,353
$
149
$
127
2,523
10
—
34
—
Total held-to-maturity securities
$
13,013
$
183
$
December 31, 2014:
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities and CMOs
$
11,156
$
113
$
Agency debentures
Agency debt securities
Municipal bonds
Corporate bonds
Total debt securities
Publicly traded equity securities(1)
Total available-for-sale securities
Held-to-maturity securities:
Agency residential mortgage-backed securities and
CMOs
Agency debentures
Agency debt securities
Other non-agency debt securities
620
487
40
5
12,308
33
28
12
1
—
154
—
$
$
12,341
$
154
$
9,793
$
217
$
164
2,281
10
2
54
—
Total held-to-maturity securities
$
12,248
$
273
$
(166) $
(12)
(4)
—
—
(1)
(183)
(1)
(184) $
(58) $
(2)
(13)
—
(73) $
(105) $
—
—
(1)
(1)
(107)
—
(107) $
(39) $
—
(6)
—
(45) $
11,763
557
143
55
35
4
12,557
32
12,589
10,444
125
2,544
10
13,123
11,164
648
499
40
4
12,355
33
12,388
9,971
166
2,329
10
12,476
(1) Publicly traded equity securities consisted of investments in a mutual fund related to the Community Reinvestment Act.
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Contractual Maturities
The contractual maturities of all available-for-sale and held-to-maturity debt securities at December 31, 2015
are shown below (dollars in millions):
Available-for-sale debt securities:
Due within one year
Due within one to five years
Due within five to ten years
Due after ten years
Total available-for-sale debt securities
Held-to-maturity debt securities:
Due within one year
Due within one to five years
Due within five to ten years
Due after ten years
Total held-to-maturity debt securities
Amortized Cost
Fair Value
$
$
$
$
— $
41
$
$
2,408
10,232
12,681
43
1,166
3,611
8,193
—
41
2,362
10,154
12,557
43
1,203
3,643
8,234
13,013
$
13,123
At December 31, 2015, the Company pledged $17 million of available-for-sale debt securities and $0.7
billion of held-to-maturity debt securities as collateral for derivatives and other purposes. At December 31, 2014, the
Company pledged $1.6 billion of available-for-sale debt securities and $3.1 billion of held-to-maturity debt securities
as collateral for repurchase agreements, derivatives and other purposes. The decrease in the amount of pledged debt
securities was a result of the termination of the wholesale funding obligations during 2015.
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Table of Contents
Investments with Unrealized or Unrecognized Losses
The following tables show the fair value and unrealized or unrecognized losses on available-for-sale and
held-to-maturity securities, aggregated by investment category, and the length of time that individual securities have
been in a continuous unrealized or unrecognized loss position at December 31, 2015 and 2014 (dollars in millions):
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, 2015:
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities
and CMOs
$ 6,832
$
Agency debentures
U.S. Treasuries
Agency debt securities
Municipal bonds
Corporate bonds
Publicly traded equity securities
Total temporarily impaired
available-for-sale securities
Held-to-maturity securities:
329
143
55
—
—
32
(88) $ 2,496
(12)
9
(4)
—
—
—
—
—
(1)
15
4
—
$
(78) $ 9,328
338
—
$
—
—
—
(1)
—
143
55
15
4
32
(166)
(12)
(4)
—
—
(1)
(1)
$ 7,391
$
(105) $ 2,524
$
(79) $ 9,915
$
(184)
Agency mortgage-backed securities
and CMOs
$ 2,807
$
Agency debentures
Agency debt securities
114
1,006
$
(25) $ 1,495
(2)
—
(10)
134
$
(33) $ 4,302
—
114
(3)
1,140
Total temporarily impaired held-
to-maturity securities
$ 3,927
$
(37) $ 1,629
$
(36) $ 5,556
$
(58)
(2)
(13)
(73)
December 31, 2014:
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities
and CMOs
$
403
$
Agency debentures
Municipal bonds
Corporate bonds
—
3
—
(1) $ 4,674
9
—
$
—
—
16
5
(104) $ 5,077
9
$
(105)
—
(1)
(1)
19
5
—
(1)
(1)
Total temporarily impaired
available-for-sale securities
Held-to-maturity securities:
Agency mortgage-backed securities
and CMOs
Agency debt securities
Total temporarily impaired held-
to-maturity securities
$
$
$
406
$
(1) $ 4,704
$
(106) $ 5,110
$
(107)
45
$
110
— $ 2,289
(1)
560
$
(39) $ 2,334
(5)
670
$
155
$
(1) $ 2,849
$
(44) $ 3,004
$
(39)
(6)
(45)
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The Company does not believe that any individual unrealized loss in the available-for-sale portfolio or
unrecognized loss in the held-to-maturity portfolio as of December 31, 2015 represents a credit loss. The Company
does not intend to sell the debt securities in an unrealized or unrecognized loss position as of the balance sheet date
and it is not more likely than not that the Company will be required to sell the debt securities before the anticipated
recovery of its remaining amortized cost of the debt securities in an unrealized or unrecognized loss position at
December 31, 2015. There were no impairment losses recognized in earnings on available-for-sale or held-to-maturity
securities during the years ended December 31, 2015 and 2014, respectively. There was a net impairment of $3 million
recognized during the year ended December 31, 2013.
Included within the Company's securities portfolios are securities that have been written-down to a zero
carrying value. The credit loss component of debt securities held by the Company that had a noncredit loss component
previously recognized in other comprehensive income was $152 million at both December 31, 2015 and 2014 and
$166 million as of December 31, 2013. Of these amounts, $123 million at both December 31, 2015 and 2014 and $121
million as of December 31, 2013 relates to debt securities that have been factored to zero, but the Company still holds
legal title to these securities until maturity or until they are sold.
Gains (Losses) on Securities and Other
The detailed components of the gains (losses) on securities and other line item on the consolidated statement
of income for the years ended December 31, 2015, 2014 and 2013 are as follows (dollars in millions):
Reclassification of deferred losses on cash flow hedges
Hedge ineffectiveness
Gains on available-for-sale securities, net:
Gains on available-for-sale securities
Losses on available-for-sale securities
Subtotal
Gains (losses) on loans, net
Gains (losses) on securities and other
Year Ended December 31,
2015
2014
2013
$
$
(370) $
(1)
$
58
(20)
38
2
(331) $
— $
(10)
42
—
42
4
36
$
$
—
1
69
(8)
61
(1)
61
Gains (losses) on securities and other were $(331) million for the year ended December 31, 2015 compared to
$36 million for the same period in 2014. Gains (losses) on securities and other for the year ended December 31, 2015
included $370 million of losses reclassified from accumulated comprehensive loss related to cash flow hedges. Gains
(losses) on securities and other for the year ended December 31, 2014 included a gain of $7 million on the sale of one-
to four-family loans modified as TDRs and a gain of $6 million recognized on the sale of available-for-sale non-
agency CMOs. See Note 12—Other Borrowings for additional information.
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NOTE 6—LOANS RECEIVABLE, NET
Loans receivable, net at December 31, 2015 and 2014 are summarized as follows (dollars in millions):
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,
2015
2014
$
2,488
$
2,114
341
4,943
23
(353)
4,613
$
$
3,060
2,834
455
6,349
34
(404)
5,979
At December 31, 2015, the Company pledged $4.2 billion and $0.3 billion of loans as collateral to the FHLB
and Federal Reserve Bank, respectively. At December 31, 2014, the Company pledged $5.4 billion and $0.5 billion of
loans as collateral to the FHLB and Federal Reserve Bank, respectively.
The following table presents the total recorded investment in loans receivable and allowance for loan losses
by loans that have been collectively evaluated for impairment and those that have been individually evaluated for
impairment by loan class at December 31, 2015 and 2014 (dollars in millions):
Recorded Investment
Allowance for Loan Losses
December 31,
December 31,
2015
2014
2015
2014
Collectively evaluated for impairment:
One- to four-family
Home equity
Consumer and other
Total collectively evaluated for impairment
Individually evaluated for impairment:
One- to four-family
Home equity
Total individually evaluated for impairment
$
2,219
$
2,764
$
31
$
1,915
344
4,478
286
202
488
2,625
461
5,850
316
217
533
255
6
292
9
52
61
Total
$
4,966
$
6,383
$
353
$
18
310
10
338
9
57
66
404
Credit Quality and Concentrations of Credit Risk
The Company tracks and reviews factors to predict and monitor credit risk in its mortgage loan portfolio on
an ongoing basis. These factors include: loan type, estimated current LTV/CLTV ratios, delinquency history,
borrowers’ current credit scores, housing prices, loan vintage and geographic location of the property. The Company
believes LTV/CLTV ratios and credit scores are the key factors in determining future loan performance. The factors
are updated on at least a quarterly basis. The Company tracks and reviews delinquency status to predict and monitor
credit risk in the consumer and other loan portfolio on at least a quarterly basis.
Credit Quality
The following tables show the distribution of the Company’s mortgage loan portfolios by credit quality
indicator at December 31, 2015 and 2014 (dollars in millions):
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Table of Contents
Current LTV/CLTV
<=80%
(1)
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,
2015
2014
2015
2014
$
1,519
$
1,757
$
609
227
133
807
311
185
843
549
420
302
$
1,081
755
557
441
$
2,488
$
3,060
$
2,114
$
2,834
77%
71%
79%
71%
90%
81%
92%
80%
(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. For home equity loans in the second lien position, the original balance of the first lien
loan at origination date and updated valuations on the property underlying the loan are used to calculate CLTV. Current property values are
updated on a quarterly basis using the most recent property value data available to the Company. For properties in which the Company did
not have an updated valuation, home price indices were utilized to estimate the current property value.
(2) The average estimated current LTV/CLTV ratio reflects the outstanding balance at the balance sheet date and the maximum available line for
home equity lines of credit, divided by the estimated current value of the underlying property.
(3) Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family purchased loans
and home equity installment loans and maximum available line for home equity lines of credit.
(1)
Current FICO
>=720
719 - 700
699 - 680
679 - 660
659 - 620
<620
Total mortgage loans receivable
One- to Four-Family
December 31,
Home Equity
December 31,
2015
2014
2015
2014
$
$
1,423
246
198
150
198
273
2,488
$
$
1,734
296
260
197
237
336
3,060
$
$
1,069
222
183
152
203
285
2,114
$
$
1,487
292
238
203
258
356
2,834
(1) FICO scores are updated on a quarterly basis; however, there were approximately $39 million and $49 million of one- to four-family loans at
December 31, 2015 and 2014, respectively, and $3 million and $4 million of home equity loans, respectively, for which the updated FICO
scores were not available. For these loans, the current FICO distribution included the most recent FICO scores where available, otherwise
the original FICO score was used.
Concentrations of Credit Risk
One- to four-family loans include interest-only loans for a five to ten year period, followed by an amortizing
period ranging from 20 to 25 years. At December 31, 2015, 39% of the Company's one- to four-family portfolio was
not yet amortizing. However, during the year ended December 31, 2015, approximately 15% of these borrowers made
voluntary annual principal payments of at least $2,500 and over a third of those borrowers made voluntary annual
principal payments of at least $10,000.
The home equity loan portfolio is primarily second lien loans on residential real estate properties, which have
a higher level of credit risk than first lien mortgage loans. Approximately 13% of the home equity portfolio was in the
first lien position and the Company holds both the first and second lien positions in less than 1% of the home equity
loan portfolio at December 31, 2015. The home equity loan portfolio consists of approximately 18% of home equity
installment loans and approximately 82% of home equity lines of credit at December 31, 2015.
Home equity installment loans are primarily fixed rate and fixed term, fully amortizing loans that do not offer
the option of an interest-only payment. The majority of home equity lines of credit convert to amortizing loans at the
end of the draw period, which typically ranges from five to ten years. Approximately 4% of this portfolio will require
the borrowers to repay the loan in full at the end of the draw period. At December 31, 2015, 61% of the home equity
line of credit portfolio had not converted from the interest-only draw period and had not begun amortizing. However,
during the year ended December 31, 2015, approximately 40% of the borrowers made annual principal payments of at
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Table of Contents
least $500 on their home equity lines of credit and slightly under half of those borrowers reduced their principal
balance by at least $2,500.
The following table outlines when one- to four-family and home equity lines of credit convert to amortizing
by percentage of the one- to four-family portfolio and home equity line of credit portfolios, respectively, at
December 31, 2015:
Period of Conversion to Amortizing Loan
Already amortizing
Through December 31, 2016
Year ending December 31, 2017
Year ending December 31, 2018 or later
% of One- to Four-Family
Portfolio
61%
17%
22%
—%
% of Home Equity Line of
Credit Portfolio
39%
45%
15%
1%
Approximately 37% and 38% of the Company’s mortgage loans receivable were concentrated in California at
December 31, 2015 and 2014, respectively. No other state had concentrations of mortgage loans that represented 10%
or more of the Company’s mortgage loans receivable at December 31, 2015 and 2014.
Delinquent Loans
The following table shows total loans receivable by delinquency category at December 31, 2015 and 2014
(dollars in millions):
December 31, 2015
One- to four-family
Home equity
Consumer and other
Total loans receivable
December 31, 2014
One- to four-family
Home equity
Consumer and other
Total loans receivable
Nonperforming Loans
Current
30-89 Days
Delinquent
90-179 Days
Delinquent
180+ Days
Delinquent
Total
$
$
$
$
2,279
1,978
334
4,591
2,813
2,702
447
5,962
$
$
$
$
72
52
6
130
88
60
7
155
$
$
$
$
26
31
1
58
28
29
1
58
$
$
$
$
111
53
—
164
131
43
—
174
$
$
$
$
2,488
2,114
341
4,943
3,060
2,834
455
6,349
The Company classifies loans as nonperforming when they are no longer accruing interest, which includes
loans that are 90 days and greater past due, TDRs that are on nonaccrual status for all classes of loans (including loans
in bankruptcy) and certain junior liens that have a delinquent senior lien. The following table shows the comparative
data for nonperforming loans at December 31, 2015 and 2014 (dollars in millions):
One- to four-family
Home equity
Consumer and other
Total nonperforming loans receivable
December 31,
2015
2014
$
$
$
263
154
1
418
$
294
165
1
460
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Real Estate Owned and Loans with Formal Foreclosure Proceedings in Process
At December 31, 2015 and 2014, the Company held $27 million and $36 million, respectively, of real estate
owned that were acquired through foreclosure or through a deed in lieu of foreclosure or similar legal agreement. The
Company also held $108 million and $107 million of loans for which formal foreclosure proceedings were in process
at December 31, 2015 and 2014, respectively.
Allowance for Loan Losses
The following table provides a roll forward by loan portfolio of the allowance for loan losses for the year
ended December 31, 2015, 2014 and 2013 (dollars in millions):
Year Ended December 31, 2015
One- to
Four-Family
Home
Equity
Consumer
and Other
Total
Allowance for loan losses, beginning of period
Provision (benefit) for loan losses
Charge-offs
Recoveries(1)
$
Charge-offs, net
Allowance for loan losses, end of period $
27
15
(2)
—
(2)
40
Allowance for loan losses, beginning of period
$
Provision (benefit) for loan losses
Charge-offs
Recoveries(1)
Charge-offs, net
Allowance for loan losses, end of period $
Allowance for loan losses, beginning of period
$
Provision (benefit) for loan losses
Charge-offs
Recoveries
Charge-offs, net
Allowance for loan losses, end of period $
One- to
Four-Family
102
(42)
(44)
11
(33)
27
One- to
Four-Family
184
(55)
(41)
14
(27)
102
$
$
$
$
$
$
367
(55)
(31)
26
(5)
307
$
$
10
—
(11)
7
(4)
6
Year Ended December 31, 2014
Home
Equity
Consumer
and Other
326
$
82
(65)
24
(41)
367
$
25
(4)
(17)
6
(11)
10
$
$
$
$
Total
Year Ended December 31, 2013
Home
Equity
Consumer
and Other
Total
257
$
40
$
192
(157)
34
(123)
326
$
6
(33)
12
(21)
25
$
404
(40)
(44)
33
(11)
353
453
36
(126)
41
(85)
404
481
143
(231)
60
(171)
453
(1)
Includes one-time payments from third party mortgage originators of $2 million and $11 million to satisfy in full all pending and future
repurchase requests with them for the years ended December 31, 2015 and 2014, respectively.
Total loans receivable designated as held-for-investment decreased $1.4 billion during the year ended
December 31, 2015. The allowance for loan losses was $353 million, or 7% of total loans receivable, as of
December 31, 2015 compared to $404 million, or 6% of total loans receivable, as of December 31, 2014.
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Impaired Loans—Troubled Debt Restructurings
TDRs include two categories of loans: (1) loan modifications completed under the Company’s programs that
involve granting an economic concession to a borrower experiencing financial difficulty, and (2) loans that have been
charged off based on the estimated current value of the underlying property less estimated selling costs due to
bankruptcy notification.
Delinquency status is the primary measure the Company uses to evaluate the performance of loans modified
as TDRs. As mentioned above, the Company classifies loans as nonperforming when they are no longer accruing
interest, which includes loans that are 90 days and greater past due, TDRs that are on nonaccrual status for all classes
of loans, including loans in bankruptcy, and certain junior liens that have a delinquent senior lien. The following table
shows a summary of the Company’s recorded investment in TDRs that were on accrual and nonaccrual status, further
disaggregated by delinquency status, in addition to the recorded investment in TDRs at December 31, 2015 and 2014
(dollars in millions):
December 31, 2015
One- to four-family
Home equity
Total
December 31, 2014
One- to four-family
Home equity
Total
Accrual
(1)
TDRs
Current
(2)
30-89 Days
Delinquent
90-179 Days
Delinquent
180+ Days
Delinquent
Total Recorded
Investment in
TDRs (3)(4)
Nonaccrual TDRs
$
$
$
$
106
120
226
121
127
248
$
$
$
$
106
42
148
111
51
162
$
$
$
$
19
11
30
24
14
38
$
$
$
$
8
8
16
12
6
18
$
$
$
$
47
21
68
48
19
67
$
$
$
$
286
202
488
316
217
533
(1) Represents loans modified as TDRs that are current and have made six or more consecutive payments.
(2) Represents loans modified as TDRs that are current but have not yet made six consecutive payments, bankruptcy loans and certain junior
lien TDRs that have a delinquent senior lien.
(3) The unpaid principal balance in one- to four-family TDRs was $283 million and $314 million at December 31, 2015 and 2014, respectively.
For home equity loans, the recorded investment in TDRs represents the unpaid principal balance.
(4) Total recorded investment in TDRs at December 31, 2015 consisted of $334 million of loans modified as TDRs and $154 million of loans
that have been charged off due to bankruptcy notification. Total recorded investment in TDRs at December 31, 2014 consisted of $354
million of loans modified as TDRs and $179 million of loans that have been charged off due to bankruptcy notification.
The following table shows the average recorded investment and interest income recognized both on a cash
and accrual basis for the Company’s TDRs during the year ended December 31, 2015, 2014 and 2013 (dollars in
millions):
Average Recorded Investment
December 31,
Interest Income Recognized
December 31,
2015
2014
2013
2015
2014
2013
One- to four-family $
Home equity
Total
$
303
213
516
$
$
576
227
803
$
$
1,205
262
1,467
$
$
9
17
26
$
$
16
18
34
$
$
33
20
53
The decrease in the average recorded investments of one- to four-family TDRs comparing the year ended
December 31, 2015 and 2014 was primarily due to the sale of $0.8 billion of one- to four-family loans modified as
TDRs during 2014.
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Table of Contents
Included in the allowance for loan losses was a specific valuation allowance of $61 million and $66 million
that was established for TDRs at December 31, 2015 and 2014, respectively. The specific allowance for these
individually impaired loans represents the forecasted losses over the estimated remaining life of the loans, including
the economic concessions granted to the borrowers. The following table shows detailed information related to the
Company’s TDRs at December 31, 2015 and 2014 (dollars in millions):
December 31, 2015
December 31, 2014
Recorded
Investment
in TDRs
Specific
Valuation
Allowance
Net Investment
in TDRs
Recorded
Investment
in TDRs
Specific
Valuation
Allowance
Net Investment
in TDRs
With a recorded allowance:
One- to four-family
Home equity
Without a recorded allowance:(1)
One- to four-family
Home equity
Total:
One- to four-family
Home equity
$
$
$
$
$
$
72
111
214
91
286
202
$
$
$
$
$
$
9
52
$
$
— $
— $
9
52
$
$
63
59
214
91
277
150
$
$
$
$
$
$
88
118
228
99
316
217
$
$
$
$
$
$
9
57
$
$
— $
— $
9
57
$
$
79
61
228
99
307
160
(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 in
a loan modification typically consist of interest rate reductions, maturity date extensions, principal forgiveness or a
combination of these concessions. The Company uses specialized servicers that focus on loan modifications and
pursue trial modifications for loans that are more than 180 days delinquent. Trial modifications are classified
immediately as TDRs and continue to be reported as delinquent until the successful completion of the trial period,
which is typically 90 days. The loan then becomes a permanent modification reported as current but remains on
nonaccrual status until six consecutive payments have been made.
The vast majority of the Company’s loans modified as TDRs include an interest rate reduction in combination
with another type of concession. The Company prioritizes the interest rate reduction modifications in combination with
the 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 be presented 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, 2015, 2014 and 2013
(dollars in millions):
Year Ended December 31, 2015
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
34
367
401
$
$
— $
—
— $
1
—
1
$
$
9
3
12
$
$
— $
2
2
$
3
19
22
$
$
13
24
37
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Table of Contents
Year Ended December 31, 2014
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
64
195
259
$
$
1
—
1
$
$
— $
—
— $
11
4
15
$
$
2
2
4
$
$
6
9
15
$
$
20
15
35
Year Ended December 31, 2013
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
324
253
577
$
$
19
—
19
$
$
5
—
5
$
$
71
7
78
$
$
11
7
18
$
$
18
7
25
$
$
124
21
145
The Company had less than $1 million in principal forgiven during the years ended December 31, 2015 and
2014. During the year ended December 31, 2013, the Company had principal forgiven of $7 million on one-to four
family loans, with a pre-modification weighted average interest rate of 5.2% and a post-modification weighted average
interest rate of 2.3%.
The Company considers modifications that become 30 days past due to have experienced a payment default.
The following table shows the recorded investment in modifications that experienced a payment default within 12
months after the modification for the years ended December 31, 2015, 2014 and 2013 (dollars in millions):
One- to four-family(1)
Home equity(2)(3)
Total
Year Ended December 31,
2015
2014
2013
Number of
Loans
7
90
97
Recorded
Investment
3
$
5
8
$
Number of
Loans
27
55
82
Recorded
Investment
9
$
3
12
$
Number of
Loans
142
69
211
Recorded
Investment
53
$
3
56
$
(1) For years ended December 31, 2015, 2014 and 2013 less than $1 million, $1 million and $18 million, respectively, of the recorded
investment in one- to four-family loans that had a payment default in the trailing 12 months was classified as current.
(2) For the years ended December 31, 2015, 2014 and 2013, $3 million, $1 million and $1 million, respectively, of the recorded investment in
home equity loans that had a payment default in the trailing 12 months was classified as current.
(3) The majority of these home equity modifications during the year ended December 31, 2015 experienced servicer transfers during this same
period.
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NOTE 7—ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into derivative transactions primarily to protect against interest rate risk on the value of
certain assets, liabilities and future cash flows. Each derivative instrument is recorded on the consolidated balance
sheet at fair value as a freestanding asset or liability. The following table summarizes the fair value amounts of
derivatives designated as hedging instruments reported in the consolidated balance sheet at December 31, 2015 and
2014 (dollars in millions):
December 31, 2015
Interest rate contracts:
Cash flow hedges
Fair value hedges
Total derivatives designated as hedging
instruments(4)
December 31, 2014
Interest rate contracts:
Cash flow hedges
Fair value hedges
Total derivatives designated as hedging
instruments(4)
Notional
(1)
Asset
Fair Value
Liability
(2)
(3)
Net
$
$
$
$
— $
2,204
2,204
$
$
2,000
1,069
3,069
$
— $
10
10
$
$
23
1
24
$
— $
(55)
(55) $
(24) $
(42)
(66) $
—
(45)
(45)
(1)
(41)
(42)
(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 at December 31, 2015 and 2014.
Cash Flow Hedges
Cash flow hedges, which include a combination of interest rate swaps and purchased options, including caps,
are used primarily to reduce the variability of future cash flows associated with existing variable-rate assets and
liabilities and forecasted issuances of liabilities. The effective portion of the changes in fair value of the derivative
instruments 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 discontinued hedges. Amounts are reclassified from accumulated other
comprehensive loss into net operating interest income as a yield adjustment in the same period the hedged forecasted
transaction affects earnings. 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 (losses) on securities and other line item in the consolidated statement of income.
At December 31, 2014, accumulated other comprehensive loss attributable to cash flow hedges, pre-tax, was
$422 million. These cash flow hedges were used to hedge the forecasted transactions related to repurchase agreements
and FHLB advances. Following E*TRADE Clearing's move out from under E*TRADE Bank on July 1, 2015, the
Company evaluated the sufficiency of the capital and liquidity position and, in early September, management and the
Board concluded that E*TRADE Bank would deploy excess capital to terminate the $4.4 billion of legacy wholesale
funding obligations. As the Company's intent changed and the hedged forecasted transactions became probable of not
occurring, the Company reclassified $370 million of pre-tax losses on cash flow hedges from accumulated other
comprehensive loss into earnings during the during 2015.
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 for the years ended December 31, 2015, 2014 and 2013 (dollars in millions):
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For the Year Ended December 31,
2015
2014
2013
Gains (losses) on derivatives recognized in OCI (effective portion), net of tax
Losses reclassified from AOCI into earnings (effective portion), net of tax(1)
Cash flow hedge ineffectiveness gains(2)
$
$
$
(10) $
(271) $
— $
(39) $
(76) $
— $
67
(87)
1
(1)
Includes the reclassification of losses deferred in accumulated other comprehensive loss into earnings related to cash flow hedges as a result
of the termination of repurchase agreements and FHLB advances during the year ended December 31, 2015.
(2) The ineffective portion of the change in fair value of the derivative instrument in a cash flow hedge, 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 (losses) on securities and other line
item in the consolidated statement of income.
Fair Value Hedges
Fair value hedges are used to offset exposure to changes in value of certain fixed-rate assets and liabilities.
Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair value of the
asset or liability being hedged on the consolidated balance sheet. Changes in the fair value of both the derivative
instruments and the underlying assets or liabilities are recognized in the gains (losses) on securities and other line item
in the consolidated statement of income. To the extent that the hedge is ineffective, the changes in the fair values will
not offset and the difference, or hedge ineffectiveness, is reflected in the gains (losses) on securities and other line item
in the consolidated statement of income.
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 and the cumulative net gain or loss on
the hedged asset or liability at the time of de-designation is amortized to interest income or interest expense using the
effective interest method over the expected remaining life of the hedged item. Changes in the fair value of the
derivative instruments after de-designation of fair value hedge accounting are recorded in the gains (losses) on
securities and other line item in the consolidated statement of income.
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 for the years ended
December 31, 2015, 2014 and 2013 (dollars in millions):
Year Ended December 31,
2015
2014
Hedging
Instrument
Hedged
Item
Hedge
Ineffectiveness
(1)
Hedging
Instrument
Hedged
Item
Hedge
Ineffectiveness
(1)
Agency debentures
Agency mortgage-backed securities
Total gains (losses) included in
earnings
$
$
(3) $
(4)
(7) $
3
3
6
$
$
— $
(1)
(100) $
(33)
$
91
32
(1) $
(133) $
123
$
(9)
(1)
(10)
Year Ended December 31,
2013
Agency debentures
Agency mortgage-backed securities
Total gains (losses) included in
earnings
Hedged
Item
Hedge
Ineffectiveness
(1)
Hedging
Instrument
73
$
34
$
(72) $
(35)
$
107
$
(107) $
1
(1)
—
(1) Reflected in the gains (losses) on securities and other line item on the consolidated statement of income.
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Credit Risk
Impact on Fair Value Measurements
Credit risk is an element of the recurring fair value measurements for certain assets and liabilities, including
derivative instruments. Credit risk is managed by limiting activity to approved counterparties and setting aggregate
exposure limits for each approved counterparty. The Company also monitors collateral requirements on derivative
instruments through credit support agreements, which reduce risk by permitting the netting of transactions with the
same counterparty upon occurrence of certain events.
The Company considered the impact of credit risk on the fair value measurement for derivative instruments,
particularly those in net liability positions to counterparties, to be mitigated by the enforcement of credit support
agreements, and the collateral requirements therein. The Company pledged approximately $130 million of its cash and
mortgage-backed securities as collateral related to its derivative contracts in net liability positions to counterparties at
December 31, 2015.
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, 2015, 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 $45 million at December 31, 2015. The fair value of the Company’s
cash and mortgage-backed securities pledged as collateral related to derivative contracts in net liability positions to
counterparties, was $130 million at December 31, 2015, which exceeded derivative instruments in net liability
positions at the counterparty level by $85 million.
NOTE 8—PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following assets at December 31, 2015 and 2014 (dollars in
millions):
December 31, 2015
December 31, 2014
Software
Leasehold improvements
Equipment
Buildings
Furniture and fixtures
Land
Construction in progress
Total
$
$
Gross
Amount
490
116
127
72
22
3
17
847
Accumulated
Depreciation
and
Amortization
$
Net
Amount
Gross
Amount
102
25
43
44
2
3
17
236
$
$
487
114
102
72
23
3
42
843
(388) $
(91)
(84)
(28)
(20)
—
—
(611) $
Accumulated
Depreciation
and
Amortization
$
Net
Amount
96
30
26
46
2
3
42
245
(391) $
(84)
(76)
(26)
(21)
—
—
(598) $
$
$
Depreciation and amortization expense related to property and equipment was $81 million, $78 million and
$89 million for the years ended December 31, 2015, 2014 and 2013, respectively.
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Software includes capitalized internally developed software costs of $42 million, $27 million and $24 million
for the years ended December 31, 2015, 2014 and 2013, respectively. Amortization of completed and in-service
software was $41 million, $47 million and $57 million for the years ended December 31, 2015, 2014 and 2013,
respectively. Software at December 31, 2015 and 2014 also included $22 million and $19 million, respectively, of
internally developed software in the process of development for which amortization has not begun.
Sale-Leaseback Transaction
During 2014, the Company executed a sale-leaseback transaction on its office located in Alpharetta, Georgia.
This transaction has been treated as a financing as it did not qualify for leaseback accounting due to the presence of a
sub-lease and various forms of continuing involvement in the lease. The Company recorded the net sales proceeds of
approximately $56 million as a financing obligation in the other liabilities line item during 2014 and the related assets
continue to be included in the property and equipment, net line item on the consolidated balance sheet.
The obligation for future minimum lease payments and minimum sublease proceeds to be received under this
lease is as follows (dollars in millions):
Years ending December 31,
2016
2017
2018
2019
2020
Thereafter
Total
Obligation for
Minimum Lease
Payments
Minimum
Sublease
Proceeds
$
$
4
4
5
5
5
19
42
$
$
(3)
(3)
(3)
(3)
(3)
(6)
(21)
NOTE 9—GOODWILL AND OTHER INTANGIBLES, NET
Goodwill
Goodwill is evaluated for impairment on an annual basis as of November 30 and in interim periods when
events or changes indicate the carrying value may not be recoverable. At December 31, 2015 and 2014, all $1.8 billion
of goodwill was allocated to the retail brokerage reporting unit within the trading and investing segment. There were
no additions or impairments to the carrying value of the Company’s goodwill during the years ended December 31,
2015 and 2014.
At the end of June 2013, the Company decided to exit its market making business. Based on this decision in
the second quarter of 2013, the Company conducted an interim goodwill impairment test for the market making
reporting unit, using the expected sale structure of the market making business. Based on the results of the first step of
the goodwill impairment test, the Company determined that the carrying value of the market making reporting unit,
including goodwill, exceeded the fair value for that reporting unit as of June 30, 2013. The Company next performed a
step two evaluation and determined that the entire carrying amount of goodwill allocated to the market making
reporting unit was impaired and recognized a $142 million impairment of goodwill during 2013.
For both the years ended December 31, 2014 and 2013, the Company elected to perform a qualitative analysis
for the retail brokerage reporting unit to determine whether it was more likely than not that the fair value was less than
the carrying value. As a result of these assessments, the Company determined that it was not necessary to perform a
quantitative impairment test and concluded that goodwill assigned to the retail brokerage reporting unit was not
impaired at both December 31, 2014 and 2013.
For the year ended December 31, 2015, the Company elected to perform a quantitative analysis for the retail
brokerage reporting unit to determine whether the fair value was less than the carrying value. As a result of this
assessment, the Company concluded that goodwill assigned to the retail brokerage reporting unit was not impaired at
December 31, 2015.
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Table of Contents
At December 31, 2015, 2014 and 2013, goodwill was net of accumulated impairment losses of $142 million
related to the trading and investing segment and $101 million related to the balance sheet management segment.
Other Intangibles, Net
The following table outlines the Company's other intangible assets with finite lives consisting of customer
lists, which are amortized on an accelerated basis (dollars in millions):
Customer Lists
Weighted Average
Original
Useful Life
(Years)
Weighted Average
Remaining
Useful Life
(Years)
Gross Amount
Accumulated
Amortization
Net Amount
December 31, 2015
December 31, 2014
20
20
10
$
11 $
435
435
$
$
(261) $
(241) $
174
194
Assuming no future impairments of customer lists or additional acquisitions or dispositions, the following
table presents the Company's future annual amortization expense (dollars in millions):
Years ending December 31,
2016
2017
2018
2019
2020
Thereafter
$
20
19
19
18
18
80
Total future amortization expense
$
174
NOTE 10—RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING
ORGANIZATIONS
Receivables from and payables to brokers, dealers and clearing organizations consist of the following (in
millions):
Receivables:
Securities borrowed
Receivables from clearing organizations
Other
Total
Payables:
Securities loaned
Payables to clearing organizations
Other
Total
December 31, 2015
December 31, 2014
120
341
59
520
$
$
1,535
$
8
33
1,576
$
474
313
97
884
1,649
9
41
1,699
$
$
$
$
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NOTE 11—DEPOSITS
Deposits are summarized as follows (dollars in millions):
Amount
December 31,
Weighted-Average Rate
December 31,
2015
2014
2015
2014
Sweep deposits(1)
Complete savings deposits
Checking deposits
Other money market and savings deposits
Time deposits(2)
Total deposits(3)
$
$
24,018
3,357
1,239
792
39
29,445
$
$
19,119
3,753
1,137
833
48
24,890
0.01%
0.01%
0.03%
0.01%
0.38%
0.01%
0.03%
0.01%
0.03%
0.01%
0.50%
0.03%
(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.
(2) Time deposits represent certificates of deposit and brokered certificates of deposit.
(3) As of December 31, 2015 and 2014, the Company had $173 million and $141 million in non-interest bearing deposits, respectively.
At December 31, 2015, scheduled maturities of time deposits were as follows (dollars in millions):
Years ending December 31,
2016
2017
2018
2019
2020
Thereafter
Subtotal
Unamortized discount, net
Total time deposits
$
$
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
millions):
Three months or less
Three through six months
Six through twelve months
Over twelve months
Total certificates of deposit
>= $100,000
December 31,
>= $250,000
December 31,
2015
2014
2015
2014
$
$
— $
1
2
1
4
$
1
1
2
2
6
$
$
— $
—
—
1
1
$
28
5
3
1
2
—
39
—
39
—
—
—
1
1
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NOTE 12— OTHER BORROWINGS
Securities sold under agreements to repurchase, FHLB advances and TRUPs at December 31, 2015 and 2014,
were as follows (dollars in millions):
Trust preferred securities(1)
Securities sold under agreements to repurchase and FHLB advances:
Repurchase Agreements(2)
FHLB Advances
Fair value hedge adjustments and deferred costs
Total securities sold under agreements to repurchase and FHLB advances
Total other borrowings
December 31,
2015
December 31,
2014
$
$
$
409
82
—
—
82
491
$
$
$
428
3,672
920
(49)
4,543
4,971
(1) The Company's TRUPs do not begin maturing until 2031.
(2) The maximum amount at any month end for repurchase agreements was $3.8 billion and $4.9 billion for the years ended December 31,
2015, respectively.
Repurchase agreements are collateralized by fixed- and variable-rate mortgage-backed securities or
investment grade securities. The counterparties retain possession of the securities collateralizing the repurchase
agreements until maturity of the repurchase agreement. The Company terminated $4.4 billion of repurchase
agreements and FHLB advances during 2015. In connection with this termination, the Company recorded a pre-tax
charge of $413 million in consolidated statement of income, including $43 million in the losses on early
extinguishment of debt line item, and $370 million in the gains (losses) on securities and other line item that were
reclassified from accumulated comprehensive loss attributable to cash flow hedges.
Prior to 2008, ETB Holdings, Inc. ("ETBH") raised capital through the formation of trusts, which sold TRUPs
in the capital markets. The capital securities must be redeemed in whole at the due date, which is generally 30 years
after issuance. Each trust issued Cumulative Preferred Securities, commonly referred to as TRUPs, at par with a
liquidation amount of $1,000 per capital security. The trusts used the proceeds from the sale of issuances to purchase
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 TRUPs occurred in 2007.
During 2015, the Company redeemed approximately $19 million of TRUPs held by ETBH Capital Trust I and
Capital Trust II in advance of maturity and recorded a net gain on early extinguishment of debt of approximately $4
million.
The face values of outstanding trusts at December 31, 2015 are shown below (dollars in millions):
Trusts
ETBH Capital Trust II(1)
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
$
$
Face Value
Maturity
Date
2031
2031
2032
2033
2034
2035
2036
2037
—
20
51
65
77
60
45
96
414
Annual Interest Rate
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
(1) The TRUPs were redeemed during December 2015 but the trust was not legally dissolved until early 2016.
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External Line of Credits maintained at E*TRADE Clearing
E*TRADE Clearing maintains secured committed lines of credit with two unaffiliated banks, aggregating to
$175 million at December 31, 2015. E*TRADE Clearing also has secured uncommitted lines of credit with several
unaffiliated banks aggregating to $375 million and unsecured uncommitted lines of credit with two unaffiliated banks
aggregating to $100 million at December 31, 2015. The secured committed lines are scheduled to mature in June 2016
while $75 million of the unsecured uncommitted line at one of the banks is scheduled to mature in August 2016. The
remaining lines have no maturity date. During 2015, E*TRADE Clearing entered into a new 364-day, $345 million
committed senior unsecured revolving credit facility with a syndicate of banks, which brought its total external
liquidity lines to $995 million. The credit facility contains maintenance covenants relating to E*TRADE Clearing's
minimum consolidated tangible net worth and regulatory net capital ratio. There were no outstanding balances for
these lines at December 31, 2015.
NOTE 13—CORPORATE DEBT
Corporate debt at December 31, 2015 and 2014 is outlined in the following table (dollars in millions):
December 31, 2015
Interest-bearing notes:
5 3/8% Notes, due 2022
4 5/8% Notes, due 2023
Total interest-bearing notes
Non-interest-bearing debt:
0% Convertible debentures, due 2019
Total corporate debt
December 31, 2014
Interest-bearing notes:
6 3/8% Notes, due 2019
5 3/8% Notes, due 2022
Total interest-bearing notes
Non-interest-bearing debt:
0% Convertible debentures, due 2019
Total corporate debt
5 3/8% Notes
Face Value
Discount
Net
$
$
540
460
1,000
8
$
1,008
$
(6) $
(5)
(11)
—
(11) $
Face Value
Discount
Net
$
$
800
540
1,340
38
$
1,378
$
(5) $
(7)
(12)
—
(12) $
534
455
989
8
997
795
533
1,328
38
1,366
In November 2014, the Company issued an aggregate principal amount of $540 million in 5 3/8% Senior
Notes, due November 2022. Interest is payable semi-annually and the notes may be called by the Company in whole or
in part at any time (1) before November 15, 2017, at a redemption price equal to 100% of their principal amount plus
the applicable "make-whole" premium, and (2) on or after November 15, 2017 at specified redemption prices, which
decline over time. The Company used the net proceeds from the issuance of the 5 3/8% Notes, along with
approximately $460 million of existing corporate cash, to redeem all of its outstanding 6 3/4% Notes and 6% Notes,
including paying the associated redemption premiums of $54 million, accrued interest and related fees and expenses.
The Company recorded $59 million in losses on early extinguishment of debt related to the redemption of the 6 3/4%
Notes and 6% Notes for the year ended December 31, 2014.
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4 5/8% Notes
In March 2015, the Company issued an aggregate principal amount of $460 million in 4 5/8% Senior Notes
due September 2023. Interest is payable semi-annually and the notes may be called by the Company in whole or in
part at any time (1) before March 15, 2018 at a redemption price equal to 100% of their principal amount plus the
applicable "make-whole" premium, and (2) on or after March 15, 2018, at specified redemption prices, which decline
over time. The Company used the net proceeds from the issuance of the 4 5/8% Notes, along with approximately $432
million of existing corporate cash to redeem all of the outstanding 6 3/8% Notes including paying the associated
redemption premiums of $68 million, accrued interest and related fees and expenses. This resulted in $73 million in
losses on early extinguishment of debt for the year ended December 31, 2015.
0% Convertible Debentures
In 2009, the Company issued an aggregate principal amount of $1.7 billion in Class A convertible debentures
and $2 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, 2015 and 2014, $30 million and $5 million of the Company’s
convertible debentures were converted into 2.9 million and 0.5 million shares of common stock, respectively. At
December 31, 2015, a cumulative total of $1.7 billion of the Class A convertible debentures and $2 million of the Class
B convertible debentures had been converted into 167.5 million shares and 0.1 million shares, respectively, of the
Company’s common stock.
Credit Facility
In November 2014, the Company entered into a $200 million senior secured revolving credit facility and in
February of 2015, entered into an amendment to increase commitments thereunder by $50 million. At December 31,
2015, there was no outstanding balance under the revolving credit facility and available capacity for borrowings was
$250 million. The credit facility expires in November 2017. The Company has the ability to borrow against the credit
facility for working capital and general corporate purposes. The credit facility contains certain maintenance covenants,
including the requirement for the parent company to maintain unrestricted cash of $100 million. In September 2015,
the Company entered into an amendment to its senior secured revolving credit facility, which reduced or removed
certain negative covenants and other restrictions on the Company pursuant to the terms of the amendment.
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. However, the notes rank effectively junior to the Company's secured indebtedness to the extent of the
collateral securing such indebtedness, including any debt drawn under the Company's $250 million senior secured
revolving credit facility.
In June 2011, certain of the Company’s subsidiaries issued guarantees on the 0% Convertible debentures.
E*TRADE Bank and E*TRADE Securities, among others, did not issue such guarantees.
Corporate Debt Covenants
The Company’s corporate debt and credit facility described above have terms which include financial
maintenance covenants. At December 31, 2015, the Company was in compliance with all such maintenance covenants.
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Future Maturities of Corporate Debt
Scheduled principal payments of corporate debt at December 31, 2015 were as follows (dollars in millions):
Years ending December 31,
2016
2017
2018
2019
2020
Thereafter
Total future principal payments of corporate debt
Unamortized discount
Total corporate debt
$
$
—
—
—
8
—
1,000
1,008
(11)
997
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NOTE 14—INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013
were as follows (dollars in millions):
Current income tax expense (benefit):
Federal
State
Foreign
Total current
Deferred income tax expense (benefit):
Federal
State
Foreign
Total deferred
Non-current income tax expense (benefit)(1)
Income tax expense (benefit)
Year Ended December 31,
2015
2014
2013
$
$
(5) $
(5)
5
(5)
(145)
(31)
—
(176)
4
(177) $
— $
4
—
4
152
3
—
155
—
159
$
—
3
—
3
127
(20)
—
107
(1)
109
(1) Non-current income tax expense (benefit) primarily relates to amortization for investments in qualified affordable housing projects
recognized under the proportional amortization method.
The following table presents the components of income before income tax expense (benefit) for the years
ended December 31, 2015, 2014 and 2013 (dollars in millions):
Domestic
Foreign
Income before income tax expense (benefit)
Unrecognized Tax Benefits
Year Ended December 31,
2015
2014
2013
$
$
84
7
91
$
$
438
14
452
$
$
186
9
195
The following table provides a reconciliation of the beginning and ending amount of unrecognized tax
benefits for the years ended December 31, 2015, 2014, and 2013 (dollars in millions):
Year Ended December 31,
2015
2014
2013
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
$
$
330
5
2
(304)
(3)
(1)
29
$
$
333
12
—
(14)
—
(1)
330
$
$
492
10
—
(163)
(5)
(1)
333
The unrecognized tax benefits decreased $301 million to $29 million during the year ended December 31,
2015. At December 31, 2015, the Company had $18 million, net of federal benefits on state issues, of unrecognized tax
benefits that, if recognized, would favorably impact the effective income tax rate in future periods. In 2015, the
Company settled the IRS examination of its 2007, 2009 and 2010 federal tax returns. As a result, the Company
released $303 million of reserves related to the uncertain tax positions in 2015. During 2009, the Company incurred a
loss on the exchange of $1.7 billion interest-bearing corporate debt for non-interest-bearing convertible debentures.
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The uncertain tax positions were primarily related to whether certain components of that loss were considered
deductible or non-deductible for tax purposes.
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
2008-2015
2013-2015
2012-2015
2007-2015
(1) Major state tax jurisdictions include California, Georgia, Illinois, New Jersey, New York and Virginia.
It is reasonably possible that the Company's unrecognized tax benefits could be reduced by as much as $4
million within the next twelve months as a result of settlements of certain examinations or expiration of statutes of
limitations.
The Company recognizes interest and penalties, if any, related to income tax matters in income tax expense.
The Company has total reserves for interest and penalties of $13 million and $21 million as of December 31, 2015 and
2014, respectively. The tax expense for the year ended December 31, 2015 includes a benefit related to reduction of
interest and penalties of $8 million, primarily related to the settlement of the IRS examination mentioned above. The
tax expense for the years ended December 31, 2014 and December 31, 2013 included an increase in the accrual for
interest and penalties of $1 million, principally related to state taxes, and an increase in accrual for interest and
penalties of $5 million, principally related to federal taxes, respectively.
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 carryforwards that created deferred tax
assets and deferred tax liabilities at December 31, 2015 and 2014 are summarized in the following table (dollars in
millions):
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Deferred tax assets:
Net operating losses
Reserves and allowances, net
Mark to market
Deferred compensation
Tax credits
Basis differences in investments
Other
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Depreciation and amortization
Other
Total deferred tax liabilities
Net deferred tax assets, net
December 31,
2015
2014
782
482
158
44
44
10
28
1,548
(82)
1,466
(433)
—
(433)
1,033
$
$
632
601
110
43
37
9
1
1,433
(91)
1,342
(387)
(4)
(391)
951
$
$
The Company is required to establish a valuation allowance for deferred tax assets and record income tax
expense if it is determined, based on evaluation of available evidence at the time the determination is made, that it is
more likely than not that some or all of the deferred tax assets will not be realized. If the Company were to conclude
that a valuation allowance was required, the resulting loss could have a material adverse effect on its financial
condition and results of operations. As of December 31, 2015, 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.
As of December 31, 2015, the Company had $1.8 billion of gross federal net operating losses, which will begin to
expire in approximately 12 years. The increase in the net operating losses deferred tax asset was primarily driven by
the release of unrecognized tax benefits as a result of the settlement of the IRS examination of the Company's 2007,
2009, and 2010 federal tax returns.
The Company’s evaluation of the need for a valuation allowance 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 12 years, including through uncertain economic and regulatory environments. The core
business is driven by brokerage customer activity and includes trading, brokerage related 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. Another factor is the sustained
profitability of the balance sheet management segment driven by various credit loss mitigation activities and
improving economic conditions that benefited both our loan portfolio as well as the securities portfolio.
The Company's valuation allowance for deferred tax assets decreased $9 million to $82 million at
December 31, 2015. 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 carryforwards which have a limited
carryforward period:
•
At December 31, 2015, the Company had certain gross foreign country net operating loss
carryforwards of $67 million and other foreign country temporary differences of approximately $16
million for which a deferred tax asset of approximately $17 million was established. The foreign net
operating losses represent the foreign tax loss carryforwards 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 $17 million
against such deferred tax assets at December 31, 2015.
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•
At December 31, 2015, the Company had gross state net operating loss carryforwards that expire
between 2016 and 2034 in several states of $3.6 billion, most of which are subject to change by
corresponding changes in apportionment. At December 31, 2015, the Company had total state
deferred tax assets, net of federal benefit, of approximately $177 million that related to the
Company's state net operating loss carryforwards and temporary differences with a valuation
allowance of $65 million against such deferred tax assets.
The Company does not intend to permanently reinvest any undistributed earnings and profits in foreign
subsidiaries. As a result, the Company has fully recorded income taxes on those earnings at December 31, 2015.
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, 2015, 2014 and 2013:
Federal statutory rate
State income taxes, net of federal tax benefit
Difference between statutory rate and foreign effective tax rate
Tax exempt income
Disallowed executive compensation
Change in valuation allowance
Tax credits
Estimated reserve for uncertain tax positions
Deferred tax adjustments(1)
Tax on undistributed earnings and profits in certain foreign
subsidiaries
Settled IRS examination
Tax impact of exit of market making business
Other
Effective tax rate
Year Ended December 31,
2015
2014
2013
35.0 %
0.2
(2.4)
(0.5)
6.5
0.1
(3.8)
4.7
3.5
3.9
(241.5)
—
(0.4)
(194.7)%
35.0%
2.0
(1.0)
(0.1)
0.6
2.2
(0.6)
(0.3)
(3.4)
1.1
—
—
(0.3)
35.2%
35.0%
2.8
(1.4)
(0.3)
0.9
1.1
(1.8)
(2.6)
4.5
2.4
—
16.4
(1.1)
55.9%
(1)
Includes the impact of New York city tax legislative changes of (5.8)% during the year ended December 31, 2015 and New York state tax
legislative changes of (1.8)% during the year ended December 31, 2014.
NOTE 15—SHAREHOLDER'S EQUITY
The activity in shareholders’ equity during the year ended December 31, 2015 is summarized in the following
table (dollars in millions):
Common Stock /
Additional Paid-In
Capital
Accumulated Deficit /
Other Comprehensive
Loss
Total
Beginning balance, December 31, 2014
Net income
Net change from available-for-sale securities
Net change from cash flow hedging instruments
Other(1)
Ending balance, December 31, 2015
$
$
7,353
$
—
—
—
6
7,359
$
(1,978) $
268
(108)
261
(3)
(1,560) $
5,375
268
(108)
261
3
5,799
(1) Other includes employee share-based compensation, conversions of convertible debentures, repurchase of common stock, and changes in
accumulated other comprehensive loss from foreign currency translation.
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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, 2015, 2014 and 2013 (dollars in millions):
Beginning balance, December 31, 2014
Other comprehensive loss before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net change
Ending balance, December 31, 2015
Beginning balance, December 31, 2013
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net change
Ending balance, December 31, 2014
Beginning balance, December 31, 2012
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net change
Ending balance, December 31, 2013
Available-for-
sale
Securities
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Total
7
$
(261) $
5
$
(249)
(84)
(10)
(24)
(108)
(101) $
271
261
— $
(3)
—
(3)
2
$
(97)
247
150
(99)
Available-for-
sale
Securities
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Total
(160) $
(298) $
5
$
(453)
193
(26)
167
7
$
(39)
76
37
(261) $
—
—
—
5
$
Available-for-
sale
Securities
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Total
137
$
(452) $
5
$
(260)
(37)
(297)
(160) $
67
87
154
(298) $
—
—
—
5
$
154
50
204
(249)
(310)
(193)
50
(143)
(453)
$
$
$
$
$
$
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The following table presents the income statement line items impacted by reclassifications out of accumulated
other comprehensive loss for the years ended December 31, 2015, 2014 and 2013 (dollars in millions):
Accumulated Other Comprehensive Loss Components
Available-for-sale securities:
Cash flow hedging instruments:
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
Year Ended December 31,
2015
2014
2013
Affected Line Items in the Consolidated
Statement of Income
$
$
39
(15)
24
$
$
42
(16)
26
$
$
60 Gains (losses) on securities and other
(23) Tax expense
37 Reclassification into earnings, net
$ (370) $ — $ — Gains (losses) on securities and other
—
(69)
—
(125)
8 Operating interest income
(147) Operating interest expense
Reclassification into earnings, before
tax
(139)
(439)
(125)
49
168
52 Tax benefit
$ (271) $ (76) $ (87) Reclassification into earnings, net
The Company terminated $4.4 billion of repurchase agreements and FHLB advances during 2015. In
connection with this termination, the Company recorded a pre-tax charge of $413 million in the consolidated statement
of income, including $43 million in the losses on early extinguishment of debt line item, and $370 million in the gains
(losses) on securities and other line item that were reclassified from accumulated comprehensive loss attributable to
cash flow hedges.
Preferred Stock
The Company has 1 million shares authorized in preferred stock. None were issued or outstanding at
December 31, 2015 or 2014.
Conversions of Convertible Debentures
During the years ended December 31, 2015 and 2014, $30 million and $5 million of the Company’s
convertible debentures were converted into 2.9 million and 0.5 million shares of common stock, respectively. For
further details on the convertible debentures, see Note 13—Corporate Debt.
Share Repurchases
On November 19, 2015, the Company announced that its Board of Directors has authorized the repurchase of
up to $800 million of shares of the Company's common stock through March 31, 2017. During the three month period
ended December 31, 2015, the Company repurchased a total of $50 million or 1.7 million shares of common stock. As
of December 31, 2015, $750 million remained available for additional repurchases. The Company accounts for share
repurchases retired after repurchase by allocating the excess repurchase price over par to APIC.
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NOTE 16—EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted earnings per share (in millions, except share
data and per share amounts):
Basic:
Net income
Basic weighted-average shares outstanding (in thousands)
Basic earnings per share
Diluted:
Net income
Year Ended December 31,
2015
2014
2013
$
$
$
268
290,762
0.92
268
$
$
$
293
288,705
1.02
293
$
$
$
86
286,991
0.30
86
Basic weighted-average shares outstanding (in thousands)
290,762
288,705
286,991
Effect of dilutive securities:
Weighted-average convertible debentures (in thousands)
2,820
3,999
4,125
Weighted-average options and restricted stock issued to
employees (in thousands)
Diluted weighted-average shares outstanding (in thousands)
Diluted earnings per share
1,429
295,011
1,399
294,103
1,473
292,589
$
0.91
$
1.00
$
0.29
For the years ended December 31, 2015, 2014 and 2013, the Company excluded 0.1 million, 0.5 million and
1.7 million shares, respectively, of stock options and restricted stock awards and units from the calculations of diluted
earnings per share as the effect would have been anti-dilutive.
NOTE 17—REGULATORY REQUIREMENTS
Broker-Dealer Capital Requirements
The Company’s U.S. broker-dealer subsidiaries are subject to the Uniform Net Capital Rule (the "Rule")
under the Securities Exchange Act of 1934 administered by the SEC and FINRA, which requires the maintenance of
minimum net capital. The minimum net capital requirements can be met under either the Aggregate Indebtedness
method or the Alternative method. Under the Aggregate Indebtedness method, a broker-dealer is required to maintain
minimum net capital of the greater of 6 2/3% of its aggregate indebtedness, as defined, or a minimum dollar amount.
Under the Alternative method, a broker-dealer is required to maintain net capital equal to the greater of $250,000 or
2% of aggregate debit balances arising from customer transactions. The method used depends on the individual U.S.
broker-dealer subsidiary. The Company’s other broker-dealers, including its international broker-dealer subsidiaries
located in Europe and Asia, are subject to capital requirements determined by their respective regulators.
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At December 31, 2015 and 2014, all of the Company’s broker-dealer subsidiaries met minimum net capital
requirements. The tables below summarize the minimum capital requirements and excess capital for the Company’s
broker-dealer subsidiaries at December 31, 2015 and 2014 (dollars in millions):
December 31, 2015:
E*TRADE Clearing(1)
E*TRADE Securities(1)(2)
Other broker-dealers
Total(3)
December 31, 2014:
E*TRADE Clearing(1)
E*TRADE Securities(1)
Other broker-dealers
Total
Required Net
Capital
Net Capital
Excess Net
Capital
$
$
$
$
161
—
1
162
170
—
1
171
$
$
$
$
1,007
$
49
15
1,071
795
459
19
1,273
$
$
$
846
49
14
909
625
459
18
1,102
(1) Elected to use the Alternative method to compute net capital. The net capital requirement was $250,000 for E*TRADE Securities for both
periods presented.
(2) E*TRADE Securities was moved out from under E*TRADE Bank in February 2015 and subsequently paid dividends of $565 million to the
parent company during the year ended December 31, 2015.
(3) E*TRADE Clearing and E*TRADE Securities paid cash dividends to the parent company of $124 million and $24 million, respectively,
subsequent to December 31, 2015.
Bank Capital Requirements
E*TRADE Financial and E*TRADE Bank are subject to various regulatory capital requirements administered
by federal banking agencies. Beginning January 1, 2015, both E*TRADE Financial and E*TRADE Bank calculate
regulatory capital under the Basel III framework using the Standardized Approach, subject to transition provisions.
Prior to Basel III becoming effective, the risk-based capital guidelines that applied to E*TRADE Bank were based
upon the 1988 capital accords of the 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. As a savings and loan holding
company, E*TRADE Financial was not previously subject to specific statutory capital requirements. Under the Basel
III framework, the vast majority of the Company's margin receivables qualified for 0% risk-weighting and a larger
portion of the Company's deferred tax assets were included in regulatory capital, both having a favorable impact on the
Company's current capital ratios. A portion of this benefit was offset by the phase-out of TRUPs from the parent
company's capital. In addition, in the first quarter of 2015, the Company made the one-time permanent election to
exclude accumulated other comprehensive income from the calculation of Common Equity Tier 1 capital.
Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on E*TRADE Financial’s
and E*TRADE Bank’s financial condition and results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, E*TRADE Financial and E*TRADE Bank must meet specific
capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. In addition, E*TRADE Bank may not pay dividends to the parent
company without, in some cases, approval from, or otherwise notice to, its regulators and any loans by E*TRADE
Bank to the parent company and its other non-bank subsidiaries are subject to various quantitative, arm’s length,
collateralization and other requirements. E*TRADE Financial’s and E*TRADE Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy require E*TRADE Financial and
E*TRADE Bank to meet minimum Common equity Tier 1 capital, Tier 1 risk-based capital, Total risk-based capital,
and Tier 1 leverage ratios. Events beyond management's control, such as deterioration in credit markets, could
adversely affect future earnings and E*TRADE Financial’s and E*TRADE Bank’s ability to meet future capital
requirements and, in the case of E*TRADE Bank, its ability to pay dividends to the parent company. E*TRADE
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Financial and E*TRADE Bank were categorized as "well capitalized" under the regulatory framework for prompt
corrective action for the periods presented in the table below (dollars in millions):
December 31, 2015(1)
December 31, 2014(1)
Actual
Well Capitalized
Minimum Capital
Excess
Capital
Actual
Well Capitalized
Minimum Capital
Excess
Capital
Amount
Ratio
Amount
Ratio
Amount
Amount
Ratio
Amount
Ratio
Amount
E*TRADE Bank:(2)
Tier 1 leverage
Tier 1 risk-based
capital
Total risk-based
capital
Common equity
Tier 1 capital(3)
$ 3,075
9.7% $ 1,579
5.0% $ 1,496
$ 4,548
10.6% $ 2,143
5.0% $ 2,405
$ 3,075
36.5% $
674
8.0% $ 2,401
$ 4,548
25.7% $ 1,063
6.0% $ 3,485
$ 3,185
37.8% $
842
10.0% $ 2,343
$ 4,772
26.9% $ 1,772
10.0% $ 3,000
$ 3,075
36.5% $
548
6.5% $ 2,527
N/A
N/A
N/A
N/A
N/A
(1) Due to the change in regulatory requirements described above, the December 31, 2015 ratios were calculated under Basel III requirements
and the December 31, 2014 ratios were calculated under Basel I requirements.
(2) E*TRADE Securities was moved out from under E*TRADE Bank in February 2015. E*TRADE Clearing was moved out from under
E*TRADE Bank in July 2015.
(3) The Basel III rule established Common Equity Tier 1 capital as a new tier of capital.
E*TRADE Financial:
Tier 1 leverage
Tier 1 risk-based capital
Total risk-based capital
Common equity Tier 1 capital
NOTE 18—LEASE ARRANGEMENTS
December 31, 2015
Actual
Well Capitalized
Minimum Capital
Excess
Capital
Amount
Ratio
Amount
Ratio
Amount
$ 3,747
$ 3,747
$ 4,186
$ 3,747
9.0% $ 2,093
5.0% $ 1,654
39.3% $
43.9% $
39.3% $
763
954
620
8.0% $ 2,984
10.0% $ 3,232
6.5% $ 3,127
The Company has non-cancelable operating leases for facilities through 2026. 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 millions):
Years ending December 31,
2016
2017
2018
2019
2020
Thereafter
Total future minimum lease payments
Sublease proceeds
Net lease commitments
Operating Lease
Commitments
$
$
$
26
26
23
21
15
22
133
(3)
130
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 million, $21 million and $22 million for the
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years ended December 31, 2015, 2014 and 2013, respectively. Rent expense, which is recorded in the occupancy and
equipment line item in the consolidated statement of income, excludes costs related to leases involved in facility
restructurings, which are recorded in the restructuring and other exit activities line item in the consolidated statement
of income.
On October 31, 2014, the Company executed a sale-leaseback transaction on its office located in Alpharetta,
Georgia. See Note 8—Property and Equipment, Net for more information.
NOTE 19—COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS
Legal Matters
The Company reviews its lawsuits, regulatory inquiries and other legal proceedings on an ongoing basis and
provides disclosure and records loss contingencies in accordance with the loss contingencies accounting guidance. The
Company establishes an accrual for losses at management's best estimate when it assesses that it is probable that a loss
has been incurred and the amount of the loss can be reasonably estimated. Once established, the estimated liability is
revised based on currently available information when an event occurs requiring an adjustment.
Litigation Matters
On October 27, 2000, Ajaxo, Inc. ("Ajaxo") filed a complaint in the Superior Court for the State of California,
County of Santa Clara. Ajaxo sought damages and certain non-monetary relief for the Company’s alleged breach of a
non-disclosure agreement with Ajaxo pertaining to certain wireless technology that Ajaxo offered the Company as well
as damages and other relief against the Company for their alleged misappropriation of Ajaxo’s trade secrets. Following
a jury trial, a judgment was entered in 2003 in favor of Ajaxo against the Company for $1 million for breach of the
Ajaxo non-disclosure agreement. Although the jury found in favor of Ajaxo on its claim against the Company for
misappropriation of trade secrets, the trial court subsequently denied Ajaxo’s requests for additional damages and
relief. On December 21, 2005, the California Court of Appeal affirmed the above-described award against the
Company for breach of the nondisclosure agreement but remanded the case to the trial court for the limited purpose of
determining what, if any, additional damages Ajaxo may be entitled to as a result of the jury’s previous finding in favor
of Ajaxo on its claim against the Company for misappropriation of trade secrets. Although the Company paid Ajaxo
the full amount due on the above-described judgment, the case was remanded back to the trial court, and on May 30,
2008, a jury returned a verdict in favor of the Company denying all claims raised and demands for damages against the
Company. Following the trial court’s entry of judgment in favor of the Company on September 5, 2008, Ajaxo filed
post-trial motions for vacating this entry of judgment and requesting a new trial. The trial court denied these motions.
On December 2, 2008, Ajaxo filed a notice of appeal with the Court of Appeal of the State of California for the Sixth
District. On August 30, 2010, the Court of Appeal affirmed the trial court’s verdict in part and reversed the verdict in
part, remanding the case. The Company petitioned the Supreme Court of California for review of the Court of Appeal
decision. On December 16, 2010, the California Supreme Court denied the Company’s petition for review and
remanded for further proceedings to the trial court. The testimonial phase of the third trial in this matter concluded on
June 12, 2012. By order dated May 28, 2014, the Court determined to conduct a second phase of this bench trial to
allow Ajaxo to attempt to prove entitlement to additional royalties. Hearings in phase two of the trial concluded
January 8, 2015. In a Judgment and Statement of Decision filed September 16, 2015, the Court denied all claims for
royalties by Ajaxo. Ajaxo’s post-trial motions were denied. Ajaxo has appealed to the Court of Appeal, Sixth District.
There is no briefing schedule on this appeal. The Company will continue to defend itself vigorously.
On May 16, 2011, Droplets Inc., the holder of two patents pertaining to user interface servers, filed a
complaint in the U.S. District Court for the Eastern District of Texas against E*TRADE Financial Corporation,
E*TRADE Securities, E*TRADE Bank and multiple other unaffiliated financial services firms. Plaintiff contends that
the defendants engaged in patent infringement under federal law. Plaintiff seeks unspecified damages and an injunction
against future infringements, plus royalties, costs, interest and attorneys’ fees. On March 28, 2012, a change of venue
was granted and the case was transferred to the United States District Court for the Southern District of New York. The
Company filed its answer and counterclaim on June 13, 2012 and plaintiff moved to dismiss the counterclaim. The
Company's motion for summary judgment on the grounds of non-infringement was granted by the U.S. District Court
in a Decision and Order dated March 9, 2015. All remaining claims are stayed pending resolution of issues on
Droplet's remaining patents under review by the Patent Trial and Appeal Board ("PTAB"). On July 6, 2015, the PTAB
instituted an inter parties review of plaintiff's 115 patent, which is scheduled to be litigated through March 2016. The
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Company will continue to defend itself vigorously in this matter, both in the District Court and at the U.S. Patent
Office.
Several cases have been filed nationwide involving the April 2007 leveraged buyout ("LBO") of the Tribune
Company ("Tribune") by Sam Zell, and the subsequent bankruptcy of Tribune. In William Niese et al. v. A.G. Edwards
et al., in Superior Court of Delaware, New Castle County, former Tribune employees and retirees claimed that Tribune
was actually insolvent at the time of the LBO and that the LBO constituted a fraudulent transaction that depleted the
plaintiffs’ retirement plans, rendering them worthless. E*TRADE Clearing, along with numerous other financial
institutions, is a named defendant in this case. One of the defendants removed the action to federal district court in
Delaware on July 1, 2011. In Deutsche Bank Trust Company Americas et al. v. Adaly Opportunity Fund et al., filed in
the Supreme Court of New York, New York County on June 3, 2011, the Trustees of certain notes issued by Tribune
allege wrongdoing in connection with the LBO. In particular the Trustees claim that the LBO constituted a
constructive fraudulent transfer under various state laws. G1 Execution Services, LLC (formerly known as E*TRADE
Capital Markets, LLC), along with numerous other financial institutions, is a named defendant in this case. In
Deutsche Bank et al. v. Ohlson et al., filed in the U.S. District Court for the Northern District of Illinois, noteholders of
Tribune asserted claims of constructive fraud and G1 Execution Services, LLC is a named defendant in this case.
Under the agreement governing the sale of G1 Execution Services, LLC to Susquehanna International Group, LLP, the
Company remains responsible for any resulting actions taken against G1 Execution Services, LLC as a result of such
investigation. In EGI-TRB LLC et al. v. ABN-AMRO et al., filed in the Circuit Court of Cook County Illinois,
creditors of Tribune assert fraudulent conveyance claims against multiple shareholder defendants and E*TRADE
Clearing is a named defendant in this case. These cases have been consolidated into a multi-district litigation. The
Company’s time to answer or otherwise respond to the complaints has been stayed pending further orders of the Court.
On September 18, 2013, the Court entered the Fifth Amended Complaint. On September 23, 2013, the Court granted
the defendants’ motion to dismiss the individual creditors’ complaint. The individual creditors filed a notice of appeal.
The steering committees for plaintiffs and defendants have submitted a joint plan for the next phase of litigation. The
next phase of the action will involve individual motions to dismiss. On April 22, 2014, the Court issued its protocols
for dismissal motions for those defendants who were "mere conduits" who facilitated the transactions at issue. The
motion to dismiss Count I of the Fifth Amended Complaint for failure to state a cause of action was fully briefed on
July 2, 2014, and the parties await decision on that motion. The Company will continue to defend itself vigorously in
these matters.
On April 30, 2013, a putative class action was filed by John Scranton, on behalf of himself and a class of
persons similarly situated, against E*TRADE Financial Corporation and E*TRADE Securities in the Superior Court of
California, County of Santa Clara, pursuant to the California procedures for a private Attorney General action. The
Complaint alleged that the Company misrepresented through its website that it would always automatically exercise
options that were in-the-money by $0.01 or more on expiration date. Plaintiffs allege violations of the California
Unfair Competition Law, the California Consumer Remedies Act, fraud, misrepresentation, negligent
misrepresentation and breach of fiduciary duty. The case has been deemed complex within the meaning of the
California Rules of Court, and a case management conference was held on September 13, 2013. The Company’s
demurrer and motion to strike the complaint were granted by order dated December 20, 2013. The Court granted leave
to amend the complaint. A second amended complaint was filed on January 31, 2014. On March 11, 2014, the
Company moved to strike and for a demurrer to the second amended complaint. On October 20, 2014, the Court
sustained the Company's demurrer, dismissing four counts of the second amended complaint with prejudice and two
counts without prejudice. The plaintiffs filed a third amended complaint on November 10, 2014. The Company filed a
third demurrer and motion to strike on December 12, 2014. By order dated March 18, 2015, the Superior Court entered
a final order sustaining the Company's demurrer on all remaining claims with prejudice. Final judgment was entered in
the Company's favor on April 8, 2015. Plaintiff filed a Notice of Appeal April 27, 2015. Briefing is scheduled to
continue through 2016. The Company will continue to defend itself vigorously in this matter.
On March 26, 2015, a putative class action was filed in the U.S. District Court for the Northern District of
California by Ty Rayner, on behalf of himself and all others similarly situated, naming E*TRADE Financial
Corporation and E*TRADE Securities as defendants. The complaint alleges that E*TRADE breached a fiduciary duty
and unjustly enriched itself in connection with the routing of its customers’ orders to various market-makers and
exchanges. Plaintiff seeks unspecified damages, declaratory relief, restitution, disgorgement of payments received by
the Company, and attorneys’ fees. By stipulation, the parties have agreed to extend indefinitely the due date for a
response to the claim. The Company will continue to defend itself vigorously in this matter.
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In addition to the matters described above, the Company is subject to various legal proceedings and claims
that arise in the normal course of business. In each pending matter, the Company contests liability or the amount of
claimed damages. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases
where claimants seek substantial or indeterminate damages, or where investigation or discovery have yet to be
completed, the Company is unable to estimate a range of reasonably possible losses on its remaining outstanding legal
proceedings; however, the Company believes any losses, both individually or in the aggregate, would not be
reasonably likely to have a material adverse effect on the consolidated financial condition or results of operations of
the Company.
An unfavorable outcome in any matter could have a material adverse effect on the Company’s business,
financial condition, results of operations or cash flows. In addition, even if the ultimate outcomes are resolved in the
Company’s favor, the defense of such litigation could entail considerable cost or the diversion of the efforts of
management, either of which could have a material adverse effect on the Company’s business, financial condition,
results of operations or cash flows.
Regulatory Matters
The securities, futures, foreign currency and banking industries are subject to extensive regulation under
federal, state and applicable international laws. From time to time, the Company has been threatened with or named as
a defendant in lawsuits, arbitrations and administrative claims involving securities, banking and other matters. The
Company is also subject to periodic regulatory examinations and inspections. Compliance and trading problems that
are reported to regulators, such as the SEC, Federal Reserve Bank of Richmond, FINRA, CFTC, NFA or OCC by
dissatisfied customers or others are investigated by such regulators, and may, if pursued, result in formal claims being
filed against the Company by customers or disciplinary action being taken against the Company or its employees by
regulators. Any such claims or disciplinary actions that are decided against the Company could have a material impact
on the financial results of the Company or any of its subsidiaries.
During 2012, the Company completed a review of order handling practices and pricing for order flow
between E*TRADE Securities and G1 Execution Services, LLC. The Company implemented changes to its practices
and procedures that were recommended during the review. Banking regulators and federal securities regulators were
regularly updated during the course of the review. Subsequently, on July 11, 2013, FINRA notified E*TRADE
Securities and G1 Execution Services, LLC that it was conducting an examination of both firms’ order handling
practices. On March 19, 2015, the Company received a Wells notice from FINRA's Market Regulation Department
relating to the adequacy of E*TRADE Securities' order-routing disclosures and supervisory process for reviewing
execution quality during the period covered by the Company's 2012 internal review (July 2011 - June 2012). The
Company continues to cooperate fully with FINRA in this examination. Under the agreement governing the sale of G1
Execution Services, LLC to Susquehanna, the Company remains responsible for any actions taken against G1
Execution Services, LLC arising from the investigation. In the case of the review of both E*TRADE Securities and G1
Execution Services, LLC such actions could include monetary penalties and cease-and-desist orders, and could prompt
claims by customers. Any of these actions could materially and adversely affect the Company’s broker-dealer
businesses.
Insurance
The Company maintains insurance coverage that management believes is reasonable and prudent. The
principal insurance coverage it maintains covers commercial general liability; property damage; hardware/software
damage; cyber liability; directors and officers; employment practices liability; certain criminal acts against the
Company; and errors and omissions. The Company believes that such insurance coverage is adequate for the purpose
of its business. The Company’s ability to maintain this level of insurance coverage in the future, however, is subject to
the availability of affordable insurance in the marketplace.
Commitments
In the normal course of business, the Company makes various commitments to extend credit and incur
contingent liabilities that are not reflected in the consolidated balance sheet. Significant changes in the economy or
interest rates may influence the impact that these commitments and contingencies have on the Company in the future.
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The Company’s equity method, cost method and other investments are generally limited liability investments
in partnerships, companies and other similar entities, including tax credit partnerships and community development
entities, which are not required to be consolidated. The Company had $54 million in unfunded commitments with
respect to these investments at December 31, 2015.
At December 31, 2015, the Company had approximately $28 million of certificates of deposit scheduled to
mature in less than one year and approximately $70 million of unfunded commitments to extend credit.
Guarantees
In prior periods when the Company sold loans, the Company provided guarantees to investors purchasing
mortgage loans, which are considered standard representations and warranties within the mortgage industry. The
primary guarantees are that: the mortgage and the mortgage note have been duly executed and each is the legal, valid
and binding obligation of the Company, enforceable in accordance with its terms; the mortgage has been duly
acknowledged and recorded and is valid; and the mortgage and the mortgage note are not subject to any right of
rescission, set-off, counterclaim or defense, including, without limitation, the defense of usury, and no such right of
rescission, set-off, counterclaim or defense has been asserted with respect thereto. The Company is responsible for the
guarantees on loans sold. If these claims prove to be untrue, the investor can require the Company to repurchase the
loan and return all loan purchase and servicing release premiums. Management does not believe the potential liability
exposure will have a material impact on the Company’s results of operations, cash flows or financial condition due to
the nature of the standard representations and warranties, which have resulted in a minimal amount of loan
repurchases.
Prior to 2008, ETBH raised capital through the formation of trusts, which sold TRUPs in the capital markets.
The capital securities must be redeemed in whole at the due date, which is generally 30 years after issuance. Each trust
issued TRUPs at par, with a liquidation amount of $1,000 per capital security. The trusts used the proceeds from the
sale of issuances to purchase subordinated debentures issued by ETBH.
During the 30-year period prior to the redemption of the TRUPs, ETBH guarantees the accrued and unpaid
distributions on these securities, as well as the redemption price of the securities and certain costs that may be incurred
in liquidating, terminating or dissolving the trusts (all of which would otherwise be payable by the trusts). At
December 31, 2015, management estimated that the maximum potential liability under this arrangement, including the
current carrying value of the trusts, was equal to approximately $417 million or the total face value of these securities
plus accrued interest payable, 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; and corporate services. Balance sheet management includes the management of asset allocation;
loans previously originated by the Company or purchased from third parties; deposits and customer payables; and
credit, liquidity and interest rate risk. The balance sheet management segment utilizes deposits and customer payables
and compensates the trading and investing segment via a market-based transfer pricing arrangement, which is
eliminated in consolidation.
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; debt extinguishment; and
corporate debt and corporate investments.
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
millions):
153
$
1
—
1
—
275
(274)
(170)
(444) $
$
$
(230)
(181)
(411) $
$
1,086
342
1,428
(40)
1,207
261
(170)
91
(177)
268
Total
1,074
740
1,814
36
1,145
633
(181)
452
159
293
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Trading and
Investing
Year Ended December 31, 2015
Corporate/
Other
Total
Net operating interest income
Total non-interest income (loss)
Total net revenue
Provision (benefit) 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 income
$
$
$
Balance Sheet
Management
383
$
(325)
58
(40)
105
702
667
1,369
—
827
542
—
542
$
(7)
—
(7) $
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
$
$
Year Ended December 31, 2014
Trading and
Investing
Balance Sheet
Management
455
$
43
498
36
148
618
697
1,315
—
766
Corporate/
Other
1
—
1
—
231
549
—
549
$
314
—
314
$
$
Year Ended December 31, 2013
Trading and
Investing
Balance Sheet
Management
442
$
64
506
143
179
527
690
1,217
—
883
334
—
334
$
184
—
184
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
$
$
154
Corporate/
Other
Total
$
$
— $
—
—
—
213
(213)
(110)
(323) $
$
969
754
1,723
143
1,275
305
(110)
195
109
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Table of Contents
Total non-interest income (loss) for balance sheet management for the year ended December 31, 2015
includes the reclassification of $370 million of losses on cash flow hedges from accumulated comprehensive loss into
earnings as a result of the termination of legacy wholesale funding obligations during 2015. Total other income
(expense) included losses on early extinguishment of debt of $112 million and $71 million during the year ended
December 31, 2015 and 2014, respectively. For additional information refer to Note 12—Other Borrowings and Note
13—Corporate Debt.
Segment Assets
As of December 31, 2015
As of December 31, 2014
As of December 31, 2013
Trading and
Investing
$
$
$
11,554
12,032
10,820
Balance Sheet
Management
33,278
$
33,075
$
34,784
$
$
$
$
Corporate/
Other(1)
595
423
676
$
$
$
Total
45,427
45,530
46,280
(1) Corporate/Other category includes corporate assets and other elimination adjustments, such as a line of credit between the operating
segments, not allocated to the Company's operating segments.
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, 2015,
2014 and 2013.
NOTE 21—CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following presents the parent company’s condensed statement of comprehensive income (loss), balance
sheet and statement of cash flows:
CONDENSED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In millions)
Dividends from subsidiaries
Other revenues
Total net revenue
Total operating expense
Income before other income (expense), income tax benefit, and equity in
income (loss) of consolidated subsidiaries
Total other income (expense)
Income before income tax benefit and equity in income (loss) of
consolidated subsidiaries
Income tax benefit
Equity in undistributed income (loss) of subsidiaries
Net income
Other comprehensive income (loss)
Comprehensive income (loss)
Year Ended December 31,
2015
2014
2013
$
$
$
859
371
1,230
487
743
(127)
616
(287)
(635)
268
150
418
$
311
333
644
421
223
(166)
57
(88)
148
293
204
497
$
$
193
281
474
359
115
(108)
7
(76)
3
86
(143)
(57)
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CONDENSED BALANCE SHEET
(In millions)
ASSETS
Cash and equivalents
Property and equipment, net
Investment in consolidated subsidiaries
Receivable from subsidiaries
Deferred tax assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Corporate debt
Other liabilities
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2015
2014
432
156
5,434
57
739
173
6,991
997
195
1,192
5,799
6,991
$
$
$
$
220
165
5,763
31
335
410
6,924
1,366
183
1,549
5,375
6,924
$
$
$
$
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CONDENSED STATEMENT OF CASH FLOWS
(In millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Equity in undistributed (income) loss from subsidiaries
Losses on early extinguishment of debt
Other
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures for property and equipment
Proceeds from sale of subsidiary
Cash contributions to subsidiaries
Other
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from issuance of senior notes
Payments on senior notes
Repurchases of common stock
Other
Net cash provided by (used in) financing activities
Increase (decrease) in cash and equivalents
Cash and equivalents, beginning of period
Cash and equivalents, end of period
$
Year Ended December 31,
2015
2014
2013
$
268
$
293
$
86
44
635
5
(163)
789
(33)
—
(147)
—
(180)
460
(800)
(50)
(7)
(397)
212
220
432
38
(148)
6
(28)
161
(62)
76
(29)
—
(15)
540
(940)
—
68
(332)
(186)
406
$
220
$
40
(3)
—
(60)
63
(24)
—
(39)
4
(59)
—
—
—
2
2
6
400
406
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, 2015, 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.
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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 millions, except per share amounts):
2015
2014
First
Second
Third
Fourth
First
Second
Third
Fourth
Total net revenue
$
Net income (loss) $
Earnings (loss)
per share:
456
40
Basic
Diluted
$
$
0.14
0.14
$
$
$
$
445
292
1.01
0.99
$
$
$
$
73
$
(153) $
454
89
(0.53) $
(0.53) $
0.31
0.30
$
$
$
$
475
97
0.34
0.33
$
$
$
$
438
69
0.24
0.24
$
$
$
$
440
86
0.30
0.29
$
$
$
$
461
41
0.14
0.14
In the first quarter of 2015, the decrease in net income was primarily due to a $73 million pre-tax loss on
early extinguishment of debt. In the third quarter of 2015, the decrease in total net revenue and net income was
primarily driven by the reclassification from accumulated comprehensive loss of $370 million of losses related to cash
flow hedges as a result of the termination of $4.4 billion in legacy wholesale funding obligations. Net income for the
third quarter of 2015 was also reduced by a $39 million pre-tax loss on early extinguishment of debt, primarily related
to the termination of the wholesale funding obligations. See Note 12—Other Borrowings, and Note 13—Corporate
Debt for additional information.
In the fourth quarter of 2014, the decrease in net income was primarily due to a $59 million pre-tax loss on
early extinguishment of debt related to the redemption of the 6 3/4% Notes and 6% Notes.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
(a)
(b)
(c)
Our management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report as required pursuant to Rule 13a-15 under the Securities Exchange Act
of 1934 ("Exchange Act"). Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that the Company's disclosure controls and procedures, as defined
in Exchange Act Rule 13a-15(e), were effective as of the end of the period covered by this report to
provide reasonable assurance that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission rules and forms and
(ii) accumulated and communicated to the Company’s management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Management's Report on Internal Controls over Financial Reporting and the attestation report of our
independent registered public accounting firm, Deloitte & Touche LLP, are included in Item 8.
Financial Statements and Supplementary Data and are incorporated herein by reference.
There were no changes in the Company’s internal control over financial reporting during the quarter
ended December 31, 2015, identified in connection with management's evaluation required by
paragraph (d) of Exchange Act Rules 13a-15 and 15d-15, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
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ITEM 9B.
OTHER INFORMATION
None.
PART III
The information required to be furnished pursuant to Items 10, 11, 12, 13, and 14 is incorporated by reference
from the Company’s definitive proxy statement for its 2015 Annual Meeting of Stockholders to be filed with the SEC
pursuant to Regulation 14A within 120 days after December 31, 2015.
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements: The information concerning our consolidated financial statements
required by this Item is incorporated by reference herein to Item 8. Financial Statements and Supplementary
Data.
2. Financial Statement Schedules:
Consolidated Financial Statement Schedules have been omitted because the required information is not
applicable, not material or is provided in the consolidated financial statements or notes thereto.
Exhibit
Number
Description
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
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 on August 4, 2010).
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 of the
Company’s Current Report on Form 8-K filed on July 1, 2014).
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
on July 22, 1996).
Indenture dated August 25, 2009 between E*TRADE Financial Corporation and The Bank of New
York Mellon, as Trustee, relating to the 0.00% Convertible Debentures due 2019 (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 0.00% Convertible Debentures due 2019 (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 6.375% 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).
Second Supplemental Indenture dated November 17, 2014 between the Company and The Bank of
New York Mellon Trust Company, N.A., as Trustee, relating to the 5.375% Senior Notes due 2022
(incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on
November 17, 2014).
Third Supplemental Indenture, dated as of March 5, 2015, between E*TRADE Financial Corporation
and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to
Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on March 5, 2015).
159
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Exhibit
Number
4.8
4.9
4.10
+10.1
†10.2
†10.3
+10.4
+10.5
+10.6
+10.7
*+10.8
10.9
*+10.10
+10.11
*12.1
*21.1
*23.1
*31.1
*31.2
*32.1
Description
Credit Agreement dated November 10, 2014 among the Company, the lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as
Syndication Agent (incorporated by reference to Exhibit 4.7 of the Company’s Form 10-K filed on
February 24, 2015).
Amendment No. 1 to Credit Agreement, dated as of September 16, 2015, among the Company, the
lenders party thereto, J.P. Morgan Chase Bank, N.A., as Administrative Agent, and Morgan Stanley
Senior Funding, Inc., as Syndication Agent (incorporated by reference to Exhibit 4.1 of the
Company’s Form 10-Q filed November 4, 2015).
364-Day Credit Agreement, dated as of June 26, 2015, among E*TRADE Clearing LLC, the Lenders
party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, U.S. Bank National Association,
as Syndication Agent, and J.P. Morgan Securities LLC and U.S. Bank National Association, as Joint
Bookrunners and Joint Lead Arrangers (incorporated by reference to Exhibit 10.3 of the Company’s
Form 10-Q filed August 5, 2015).
Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 of the Company’s
Form 10-K filed February 24, 2010).
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).
Global Amendment to the Master Services Agreement and Global Services Schedule, dated
November 19, 2013, by and between Broadridge Securities Processing Solutions, Inc. (formerly
known as ADP Financial Information Services, Inc.) and E*TRADE Group, Inc. now known as
E*TRADE Financial Corporation (incorporated by reference to Exhibit 10.3 of the Company’s Form
10-K filed on February 25, 2014).
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).
2015 Omnibus Incentive Plan (incorporated by reference to the Company’s Definitive Proxy
Statement on Schedule 14A filed on March 25, 2015).
Form of Executive Restricted Stock Award Agreement for Amended 2005 Equity Incentive Plan
(incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K filed on
February 24, 2015).
Form of Performance Share Unit Award Agreement for Amended 2005 Equity Incentive Plan
(incorporated by reference to Exhibit 10.6 of the Company’s Annual Report on Form 10-K filed on
February 24, 2015).
Form of Performance Share Unit Award Agreement for 2015 Equity Incentive Plan.
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 Michael A.
Pizzi, Michael E. Foley and Karl A. Roessner.
Employment Agreement dated October 21, 2015 by and between E*TRADE Financial Corporation
and Paul T. Idzik (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed on
November 4, 2015).
Statement of Ratio of Earnings to Fixed Charges.
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification—Section 302 of the Sarbanes-Oxley Act of 2002
Certification—Section 302 of the Sarbanes-Oxley Act of 2002
Certification—Section 906 of the Sarbanes-Oxley Act of 2002
160
Table of Contents
Exhibit
Number
*101.INS
Description
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.
Portions of this exhibit were omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to
a request for confidential treatment.
161
Table of Contents
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 24, 2016
E*TRADE Financial Corporation
(Registrant)
By
/S/ PAUL T. IDZIK
Paul T. Idzik
Chief Executive Officer
(Principal Executive Officer)
By
/S/ MICHAEL A. PIZZI
By
Michael A. Pizzi
Chief Financial Officer
(Principal Financial Officer)
/S/ BRENT B. SIMONICH
Brent B. Simonich
Corporate Controller
(Principal Accounting Officer)
162
Table of Contents
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 24, 2016
/S/ MICHAEL A. PIZZI
Chief Financial Officer (Principal
February 24, 2016
Michael A. Pizzi
Financial Officer)
/S/ BRENT B. SIMONICH
Brent B. Simonich
Corporate Controller (Principal
Accounting Officer)
February 24, 2016
/S/ RODGER A. LAWSON
Rodger A. Lawson
Chairman of the Board
February 24, 2016
/S/ RICHARD J. CARBONE
Richard J. Carbone
Director
February 24, 2016
/S/ JAMES P. HEALY
James P. Healy
Director
February 24, 2016
/S/ FREDERICK W. KANNER
Frederick W. Kanner
Director
February 24, 2016
/S/ JAMES LAM
James Lam
Director
February 24, 2016
/S/ SHELLEY B. LEIBOWITZ
Shelley B. Leibowitz
Director
February 24, 2016
/S/ REBECCA SAEGER
Rebecca Saeger
Director
February 24, 2016
/S/ JOSEPH L. SCLAFANI
Joseph L. Sclafani
Director
/S/ GARY H. STERN
Gary H. Stern
/S/ DONNA L. WEAVER
Donna L. Weaver
Director
Director
February 24, 2016
February 24, 2016
February 24, 2016
163