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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-K
______________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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, 2016, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $4.3 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 17, 2017, there were 274,678,179 shares of common stock outstanding.
Documents Incorporated by Reference: Certain portions of the definitive Proxy Statement related to the Company’s 2017 Annual
Meeting of Stockholders, to be filed hereafter (incorporated into Part III hereof).
Table of Contents
E*TRADE FINANCIAL CORPORATION
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 2016
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Forward-Looking Statements
Business
Overview
Strategy
Products and Services
Sales and Customer Service
Competition
Regulation
Available Information
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Earnings Overview
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
Quantitative and Qualitative Disclosures about Market Risk
Key Terms
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
Consolidated Balance Sheet
Consolidated Statement of Shareholders’ Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
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2
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6
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Note 1—Organization, Basis of Presentation and Summary of Significant Accounting
Policies
Note 2—Business Acquisition
Note 3—Restructuring and Acquisition-Related Activities
Note 4—Interest Income and Interest Expense
91
102
103
104
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Note 5—Fair Value Disclosures
Note 6—Offsetting Assets and Liabilities
Note 7—Available-for-Sale and Held-to-Maturity Securities
Note 8—Loans Receivable, Net
Note 9—Derivative Instruments and Hedging Activities
Note 10—Property and Equipment, Net
Note 11—Goodwill and Other Intangibles, Net
Note 12—Receivables From and Payables To Brokers, Dealers and Clearing
Organizations
Note 13—Deposits
Note 14—Other Borrowings
Note 15—Corporate Debt
Note 16—Income Taxes
Note 17—Shareholders' Equity
Note 18—Earnings Per Share
Note 19—Regulatory Requirements
Note 20—Lease Arrangements
Note 21—Commitments, Contingencies and Other Regulatory Matters
Note 22—Condensed Financial Information (Parent Company Only)
Note 23—Quarterly Data (Unaudited)
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
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135
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151
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Unless otherwise indicated, references to "the Company," "we," "us," "our," "E*TRADE" and
"E*TRADE Financial" 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, the Converging Arrows logo and OptionsHouse 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 statements
regarding our capital plan initiatives and expected balance sheet size, the payment of dividends from our
subsidiaries to our parent company, the management of our legacy loan portfolio, our ability to utilize
deferred tax assets, the expected implementation and applicability of government regulation and our ability
to comply with these regulations, continued repurchases of our common stock, payment of dividends on our
preferred stock, our ability to meet upcoming debt obligations, the integration and related restructuring costs
of past and any future acquisitions, the expected outcome of existing or new litigation, our ability to execute
our business plans and manage risk, the potential decline of fees and service charges, the future sources of
revenue, expense and liquidity and any other 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, changes in business, economic or political condition, performance, volume and volatility in
the equity and capital markets, performance of the residential real estate and credit markets, changes in
interest rates or interest rate volatility, credit and counterparty risk, customer demand for financial products
and services, our ability to continue to compete effectively, cyber security threats, reliance on technology
infrastructure, our ability to participate in consolidation opportunities in our industry, our ability to service our
corporate debt, changes in government regulation or actions by our regulators, our ability to move capital to
our parent company from our subsidiaries, adverse developments in litigation, and other factors discussed
under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations;
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. Investors 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.
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ITEM 1. BUSINESS
OVERVIEW
We are a financial services company that provides online brokerage and related products and services
primarily to individual retail investors. Founded on the principle of innovation, we aim to enhance the
financial independence of traders and investors through a powerful digital experience that includes tools
and educational material, supported by professional guidance, to help individual investors and traders meet
their near- and long-term investing goals. We provide these services to customers through our digital
platforms and network of industry-licensed customer service representatives and Financial Consultants,
over the phone and by email at two national branches and in-person at 30 regional branches across the
United States. We operate federally chartered savings banks with the primary purpose of maximizing the
value of deposits generated through our brokerage business.
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 3,600 employees at December 31, 2016. We operate directly and through several
subsidiaries, many of which are overseen by governmental and self-regulatory organizations. Substantially
all of our revenues for the years ended December 31, 2016, 2015 and 2014 were derived from our
operations in the United States. Our most important subsidiaries are described below:
• E*TRADE Securities LLC (E*TRADE Securities) is a registered broker-dealer that clears and settles
securities transactions for its customers. Our legacy clearing firm, E*TRADE Clearing LLC (E*TRADE
Clearing), was merged into E*TRADE Securities effective October 1, 2016.
• Aperture, LLC (dba OptionsHouse) is a registered broker-dealer acquired on September 12, 2016 that
provides brokerage products and services primarily to active traders through its derivatives platform.
• E*TRADE Bank and its subsidiary E*TRADE Savings Bank are federally chartered savings banks which
provide our customers with Federal Deposit Insurance Corporation (FDIC) insurance on qualifying
amounts of customer deposits and other banking and cash management capabilities. We utilize our
bank structure to effectively monetize the value of brokerage deposits.
• E*TRADE Financial Corporate Services is a provider of software and services for managing equity
compensation plans to our corporate clients.
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Delivering a powerful digital offering 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. Our hybrid
service delivery model is available through the following award-winning digital platforms, which include both
E*TRADE and OptionsHouse products:
Web
Our leading-edge sites for customers and our primary channel to interact with
prospects
• Access to a broad range of trading solutions
• Actionable ideas and information
• Research and knowledge for decision making
Mobile
Powerful trading applications for smartphones, tablets and watches
• Award-winning mobile apps
• Platform to manage accounts on the move
• Stock and portfolio alerts
Active Trading Platform
Powerful software-based trading application
• Sophisticated trading tools
• Idea generation and analysis
• Advanced portfolio and market tracking
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.
STRATEGY
Our business strategy is centered on two key objectives: accelerating the growth of our core brokerage
business to 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 overall customer experience
We are focused on delivering cutting-edge trading solutions while improving our market position in
investing products. Through these offerings, we aim to continue growing our customer base while
deepening engagement with our existing customers.
• Capitalize on value of corporate services channel
We leverage our industry-leading position in corporate stock plan administration to improve client
acquisition and engage with plan participants to bolster awareness of our full suite of offerings. Our
corporate services channel is a strategically important driver of brokerage account and asset growth.
Generate Robust Earnings Growth and Healthy Returns on Capital
• Utilize balance sheet to enhance returns
We utilize our bank structure to effectively monetize brokerage relationships by investing stable, low-
cost deposits primarily in agency mortgage-backed securities. Meanwhile, we continue to manage
down the size and risk associated with our legacy loan portfolio.
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• Put capital to work for shareholders
As we continue to deliver on our capital plan initiatives, we are focused on generating and effectively
deploying excess capital for the benefit of our shareholders.
PRODUCTS AND SERVICES
We offer a broad range of products and services to our customers. Our core brokerage business is
organized into three product areas: Trading, Investing, and Corporate Services. Additionally, we offer
banking and cash management capabilities, including FDIC-insured deposit accounts, which are fully
integrated into customer brokerage accounts. Among other features, customers have access to debit cards
with ATM fee refunds, online and mobile bill pay, mobile check deposits and Apple Pay.
Trading
Trading products deliver automated trade order placement and execution services. We offer our customers
a full range of investment vehicles including U.S. equities, exchange-traded funds (ETFs), options, bonds,
futures, American depositary receipts (ADRs), and non-proprietary mutual funds. Margin accounts are also
available to qualified customers, enabling them to borrow against their securities. We provide margin
solutions, including calculators and requirement lookup and analysis tools, helping customers strategize,
plan, and execute margin trades efficiently and effectively.
The Company markets trading products and services to self-directed investors and active traders. Products
and services are delivered through web, desktop, and mobile digital channels. Trading and investing tools
are supported by guidance, including fixed income, options, and futures specialists available on-call for
customers. Other tools and resources include independent research and analytics, live and on-demand
education, and strategies, trading ideas, and screeners for major asset classes.
Investing
Investing products help investors build wealth and address their long-term investing needs. Products and
services include individual retirement accounts (IRAs), including Roth IRAs, virtual advice through our
Adaptive Portfolio product, managed investment portfolios, unified managed accounts, and separately
managed accounts. Investors are provided a full breadth of digital tools through web and mobile channels to
address their investing needs. These include resource centers, allocation tools, educational, and editorial
content.
The Company also offers guidance through a team of licensed Financial Consultants and Chartered
Retirement Planning CounselorsSM at our 30 regional branches across the country, and through our two
national branches by phone and email. Customers can receive complimentary portfolio reviews and
personalized investment recommendations.
Corporate Services
The Corporate Services channel provides stock plan administration services for both public and private
companies. Through its industry-leading platform, Equity Edge Online™, the Company offers management
of employee stock option plans, employee stock purchase plans, and restricted stock plans with fully-
automated stock plan administration, as well as accounting, reporting, and scenario modeling tools. The
integrated stock plan solutions include multi-currency settlement and delivery, disbursement in international
countries, and streamlined tax calculation. Additionally, corporate clients are offered 10b5-1 plan design and
implementation, and SEC filing assistance. The Company's digital platforms allow participants in corporate
client stock plans to view and manage their holdings. Additionally, participants have access to educational
tools, restricted stock sales support, and dedicated stock plan service representatives. The Corporate
Services channel is an important driver of brokerage account and asset growth, serving as an introductory
channel for the Company's core brokerage business, with approximately 1.5 million individual stock plan
accounts across approximately 1,000 corporate clients that represent approximately 20% of S&P 500
companies.
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Equity Edge Online™ recordkeeping and reporting was rated #1 in Loyalty and Overall Satisfaction for the
fifth year in a row by Group Five, an independent consulting and research firm, in its 2016 Stock Plan
Administration Study Industry Report.
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 and thorough manner. 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:
Online
Our Online Service Center serves as a portal 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 customer service representative can assist with the
customer's inquiry.
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.
COMPETITION
The online financial services industry continues to evolve and remains highly competitive. Our core
brokerage business 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. We also compete
with all users of market liquidity, including the types of competitors listed above, in order to obtain the least
expensive source of funding.
Competition in the financial services industry continues to intensify, particularly amidst continued
consolidation and declines in pricing over time. The proliferation of emerging financial technology start-ups
further evidences the continued shift to digital advice. Our future success will rely upon our ability to keep
providing digitally compelling and easy to use products and solutions to retail customers.
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.
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REGULATION
Our business is subject to regulation, primarily by U.S. federal and state regulatory agencies and certain
self-regulatory organizations (SROs), such as central banks and securities exchanges, that have been
charged with the protection of the financial markets and the interests of those participating in those markets.
We, along with other larger institutions, have been subject to a broad range of rules and regulations and a
climate of heightened regulatory scrutiny, particularly with respect to compliance with laws and regulations,
including controls and business processes. This scrutiny and related rule-making has resulted in part from
the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in
2010. The Dodd-Frank Act contains various provisions designed to enhance financial stability and to reduce
the likelihood of another financial crisis and significantly changed the bank regulatory structure of our
Company and its thrift subsidiaries. While the substance and full impact of the Dodd-Frank Act and other
laws and regulations to which we are subject may be affected by changes in the U.S. political landscape
and may not be fully known for months or years, we expect to continue to incur costs to implement the new
requirements and monitor for continued compliance.
Regulators
Our primary regulators include, among others, the Securities and Exchange Commission (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).
Financial Services Regulation
Our regulators and regulatory examiners are increasingly focused on ensuring that our customer privacy,
data protection, information security and cyber 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, information
security and cyber security requirements, including procedures designed to securely process, transmit and
store confidential information and protect against unauthorized access to such information.
Our brokerage and banking entities are also required to disclose their privacy policies and practices related
to sharing customer information with affiliates and non-affiliates by the Gramm-Leach-Bliley Act of 1999.
These rules 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.
As well, 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.
Brokerage Regulation
Our U.S. broker-dealers are registered with the SEC and are subject to regulation by the SEC and by
SROs, such as FINRA and the securities exchanges of which each is a member, as well as various state
regulators. In addition, they are registered with the CFTC as futures commission merchants (FCMs) and are
members of the NFA. Such regulation covers various aspects of these broker-dealers, 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
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margin and options transactions, registration of personnel and transactions with affiliates. Our international
broker-dealer is regulated by the Hong Kong Securities & Futures Commission.
In April 2016, the U.S. Department of Labor published its final fiduciary regulations under the Employee
Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986. While currently scheduled
to take effect in 2017, it is possible that implementation may be delayed. These regulations will subject
certain persons, such as broker-dealers and other financial services providers that provide investment
advice to individual retirement accounts and other qualified retirement plans and accounts, to fiduciary
duties and prohibited transaction restrictions for a wider range of customer interactions. The Company is in
the process of implementing the regulations, which has resulted in additional internal costs and expenses.
Implementation of the regulations will have an impact on how advice is provided to our customers' tax-
qualified retirement accounts and benefit plans and, in their current form, may diminish our profitability and
will increase potential liabilities with respect to these accounts and plans.
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 banking and 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.
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.
E*TRADE Bank is a federally chartered savings association and therefore is subject to regulation,
supervision and examination by the OCC, which is its primary regulator, and by the CFPB. In addition,
because E*TRADE Bank is an insured depository institution, it is subject to supervision by the FDIC.
Under the Dodd-Frank Act, all companies, including savings and loan holding companies, that directly or
indirectly control an insured depository institution are required to serve as a source of strength for the
institution.
Regulatory Capital Requirements
The Dodd-Frank Act also imposed new banking regulatory capital requirements at the Company, effective
January 1, 2015. Previously, only E*TRADE Bank was subject to bank 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 established Common Equity Tier 1
capital as a new tier of capital, raised the minimum thresholds for required capital, increased minimum
required risk-based capital ratios, narrowed the eligibility criteria for regulatory capital instruments, provided
for new regulatory capital deductions and adjustments, and modified 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 at least 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. In addition,
certain new deductions from and adjustments to regulatory capital are subject to a phase-in period over a
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four year period that began at 40% in 2015 and will be fully implemented at 100% in 2018. We expect to
remain compliant with the Basel III framework as it is phased-in.
In addition, in certain circumstances each of our banking entities may be subject to restrictions on their
ability to declare dividends or make capital distributions and may be required to submit applications or
requests for non-objection from the OCC or the Federal Reserve in connection with a planned capital
distribution. 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 or non-objection is required, a federal savings association is still required to provide
the OCC with notice of the proposed distribution. Federal savings associations that are subsidiaries of
savings and loan holding companies may also be required to obtain the non-objection of or provide notice of
a proposed dividend to 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. A savings and loan holding company, such as the Company, is also
required to notify and consult with the Federal Reserve in advance of taking capital actions when, among
other things, doing so could create safety and soundness concerns or the savings and loan holding
company is experiencing financial weakness.
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 the Company, 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.
Deposit Insurance Assessments
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 March 25, 2016,
the FDIC published its final rule to add a surcharge to the regular DIF assessments of banks with $10 billion
or more in assets, which includes E*TRADE Bank. Under the final rule, E*TRADE Bank is subject to an
additional surcharge applied to its assessment base, which took effect for the assessment period beginning
on July 1, 2016. Surcharges at an annual rate of 4.5 basis points will be assessed until the sooner of (1) the
DIF attaining the minimum reserve ratio of 1.35 percent of insured deposits or (2) the fourth quarter of 2018.
The FDIC anticipates eight quarters of "surcharge assessments." There may be a one-time “shortfall
assessment” in the first quarter of 2019 to bring the fund immediately to 1.35 percent if needed. The
surcharge has not had, and is not expected to have, a material impact on our financial condition, results of
operations or cash flows.
Home Owners' Loan Act
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.
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.
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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
In October 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
publishes by February 15 of each year.
E*TRADE Bank is required to publish certain results of its annual stress test between October 15 and
October 31 each year. In October 2016, E*TRADE Bank publicly disclosed a summary of its stress test
results under the severely adverse scenario prescribed by the Federal Reserve and OCC based upon a
nine-quarter period beginning on January 1, 2016 and ending on March 31, 2018. In the summary,
E*TRADE Bank reported that its Tier 1 leverage ratio of 9.7% at the beginning of the forecast period
declined to 8.5% at the end of the nine-quarter forecast horizon, which is well in excess of required
minimum capital levels.
The Company will be required to conduct its first annual stress test using financial statement data as of
December 31, 2016, report the results of the stress test to the Federal Reserve on or before July 31, 2017,
and disclose a summary of the stress test results in October 2017.
For additional regulatory information on our brokerage and banking regulations, see Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources
and Item 8. Financial Statements and Supplementary Data—Note 19—Regulatory Requirements.
Regulatory Developments
The Company is currently not subject to certain regulatory requirements that apply to banking organizations
with $50 billion or more in total consolidated assets as defined by each applicable regulation. Fifty billion
dollars in total consolidated assets, which is measured in accordance with each applicable regulation, but
generally on the basis of the average of the four most recent quarters, is a meaningful regulatory threshold,
as U.S. banking organizations become subject to a number of additional, and in some cases more stringent,
regulatory requirements once they reach that size. The Company expects these regulations, not all of which
have been finalized, to become applicable as it surpassed $50 billion in total consolidated assets in the first
quarter of 2017 and expects to surpass $50 billion on a four quarter average later this year. The Company
has begun implementing policies, procedures, systems and governance structures that are designed to
comply with the anticipated requirements. Additionally, while savings and loan holding companies are
currently excluded from the scope of certain regulations that apply to bank holding companies, the
Company expects it will ultimately be subject to these requirements.
Comprehensive Capital Adequacy Review
The Company is currently not subject to the annual Comprehensive Capital Analysis and Review (CCAR)
process, which requires certain financial institutions to submit annual capital plans to the Federal Reserve.
Through the CCAR process, the Federal Reserve may object to a banking organization's planned capital
actions for the coming year. When the Federal Reserve objects to a capital plan, the banking organization
may not make any capital distributions unless expressly permitted by the Federal Reserve. When the
Federal Reserve does not object to a capital plan, the banking organization must request prior approval for
any capital distributions that will exceed the amount described in the capital plan. The Company expects the
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CCAR process, which currently only applies to bank holding companies with total consolidated assets of
greater than or equal to $50 billion on a four quarter average, will be applicable to the Company in the
future and will continue to monitor related regulatory updates and developments.
Resolution and Recovery Plans
In October 2011, the Federal Reserve and the FDIC issued a final rule requiring bank holding companies
with total consolidated assets of $50 billion or more, based on the average of the four most recent quarters,
to submit resolution plans and requiring each plan to describe the company’s strategy for rapid and orderly
resolution in bankruptcy during times of financial distress. The Company is not currently subject to this rule
as savings and loan holding companies are currently excluded from its scope.
In January 2012, the FDIC issued interim final rules requiring insured depository institutions, such as
E*TRADE Bank, with total assets of $50 billion or more, based on the average of the four most recent
quarters, to submit to the FDIC periodic plans providing for their resolution by the FDIC in the event of
failure (resolution plans or living wills) under the receivership and liquidation provisions of the Federal
Deposit Insurance Act. E*TRADE Bank is currently not subject to these rules, but if it were to exceed the
asset threshold, it would be required to file with the FDIC an annual resolution plan demonstrating how it
could be resolved in an orderly and timely manner in the event of receivership such that the FDIC would be
able to ensure the bank's depositors receive access to their deposits within one business day, to maximize
the net present value of the bank's assets when disposed of, and to minimize losses incurred by the bank's
creditors.
In September 2016, the OCC published final guidelines that establish standards for recovery planning by
insured national banks, federal savings associations, and federal branches of foreign banks with average
total consolidated assets of $50 billion or more, based on the average of the four most recent quarters.
E*TRADE Bank is currently not subject to these guidelines, but if it were to exceed the asset threshold, it
would be required to develop and maintain a recovery plan for identifying and responding rapidly to
significant stress events that could affect its financial condition and threaten its viability. The recovery plan
would need to identify triggers for escalation of information to senior management and the board of
directors, identify a wide range of credible options that E*TRADE Bank could undertake in response to
severe stress, and be integrated into E*TRADE Bank’s risk governance function.
Liquidity Requirements
In September 2014, federal banking agencies issued a final inter-agency rule that imposes a quantitative
liquidity coverage ratio (LCR) requirement on large banking institutions. The purpose of the LCR is to
require banking organizations to hold minimum amounts of high-quality liquid assets (HQLA) based on a
percentage of their net cash outflows over a 30-day period. Banking organizations with $250 billion or more
in total consolidated assets or foreign exposures of $10 billion or more must hold HQLA in an amount equal
to at least 100% of their projected net cash outflows over a 30-day period. Bank and savings and loan
holding companies with total consolidated assets of $50 billion or more, based on the average of the four
most recent quarters, are subject to a modified LCR requiring them to hold HQLA in an amount equal to at
least 70% of their projected net cash outflows over a 30-day period. The Company believes the LCR is an
important measure of liquidity and has been managing against it in preparation for the applicability of these
requirements. Based on anticipated balance sheet growth the Company expects to be subject to these
requirements beginning April 1, 2018.
In May 2016, federal banking agencies issued a proposed inter-agency rule that would impose a net stable
funding requirement, the net stable funding ratio (NSFR), for large banking organizations with $50 billion or
more in total consolidated assets. The proposed NSFR requirement would require a banking organization
subject to the rule to maintain a sufficient level of stable funding relative to a measure based on the liquidity,
maturity, quality and other characteristics of the organization’s assets and certain off-balance sheet
exposures. The proposed NSFR requirement is designed to reduce the likelihood that disruptions to a
banking organization’s regular sources of funding will compromise its liquidity position, as well as to
promote improvements in the measurement and management of liquidity risk. The proposed NSFR
requirement would apply to the same banking organizations that are subject to the LCR, and, also like the
LCR, includes a modified version of the requirement for bank and savings and loan holding companies with
total consolidated assets of $50 billion or more and less than $250 billion, based on the average of the four
most recent quarters. Banking organizations subject to the modified NSFR would be required to maintain a
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lower stable funding amount and have additional time to comply once they become subject to the
requirements. The proposal contemplates that the NSFR would go into effect on January 1, 2018.
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
Changes in business, economic, or political conditions that negatively impact global
financial markets could reduce trading volumes and margin lending, 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. Changes in business, economic or political conditions
could cause a downturn in the global financial markets. Such a downturn could decrease volume and price
levels of securities transactions which may, in turn, result in lower transactions revenue. 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 on our
business.
Net interest income is our most significant source of revenue. Our results of operations depend, in part, on
our level of net 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 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 interest income.
Net interest margin may fluctuate based on the size and mix of the balance sheet, as well as the impact
from the interest rate environment.
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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 (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. Also, 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.
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 and we cannot assure 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 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, 2016, much of our capital was invested in our banking subsidiary, E*TRADE Bank. 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. As we expect to use excess capital generated by E*TRADE Bank
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to grow our balance sheet, we do not expect to distribute dividends from E*TRADE Bank to the parent until
2018.
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 December 31 of each year, and to submit the results prior to
July 31 of the following year. E*TRADE Bank is also required to publish summary results of its annual stress
test between October 15 and October 31 each year. In 2016, 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.
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, or different 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. Some of our competitors
may also benefit from established relationships among themselves or with third parties that enhance 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, adapt 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
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• The differences in regulatory oversight regimes to which we and our competitors are subject
• Attracting new employees and retaining our existing employees
• 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.
For example, on September 12, 2016, we completed the acquisition of Aperture New Holdings, Inc., the
ultimate parent company of OptionsHouse, an online brokerage, for $725 million in cash. The acquisition
subjects us to a number of risks, uncertainties, and potential costs, including that:
• We may experience significant attrition in the acquired accounts or experience other issues that would
prevent us from achieving synergies consistent with the expected amounts or within the anticipated
timeframe.
• Our retention of customers’ assets may be impacted by our ability to successfully integrate the acquired
operations, products (including pricing) and personnel.
• Attempts to retain key personnel may not succeed.
• We could be subject to undisclosed liabilities that could be material or become subject to litigation or
regulatory risks as a result of the acquisition.
• Management’s attention may be diverted from other business initiatives.
• Unanticipated restructuring costs may be incurred.
• There may be negative changes in general economic conditions in the regions or the industries in which
the combined businesses operate.
• We will have less cash available for other purposes, including for use in acquisitions or the development
of other technologies or products.
Any future acquisitions could involve these and additional risks. Our ability to pursue additional strategic
transactions may also be limited by our corporate debt, including our senior secured credit facility. Future
acquisitions may also be funded through the issuance of additional debt or preferred stock.
Any of these risks, whether with respect to the current or any future acquisitions, 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 (DDoS) 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
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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 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.
We may continue to experience losses in our mortgage loan portfolio.
At December 31, 2016, the principal balance of our one-to four-family loan portfolio was $2.0 billion and the
allowance for loan losses for this portfolio was $45 million. At December 31, 2016, the principal balance of
our home equity loan portfolio was $1.6 billion and the allowance for loan losses for this portfolio was $171
million. Although the provision for loan losses has declined in recent periods and we recognized a benefit
for loan losses of $149 million during the year ended December 31, 2016, 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 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 additional risk of loss. For example, at
December 31, 2016:
• Approximately 12% and 29% 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 40% of the one- to four-family and home equity loan portfolios, respectively.
• Approximately 24% and 15% 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.
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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, 2016:
• 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.
• The majority of home equity lines of credit (HELOCs) convert to amortizing loans at the end of the draw
period, which typically ranges from five to ten years. At December 31, 2016, 85% of the home equity
line of credit portfolio had converted to amortizing. Less than 1% 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 87% as of December 31, 2016.
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 HELOCs that exceed our current expectations could negatively
impact our financial performance.
Unauthorized disclosure of customer data, 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.
We are dependent on information technology to securely process, transmit and store electronic information
and to communicate among our locations and with our clients and third party service providers. As the
breadth and complexity of this infrastructure continue to grow, the potential risk of breach of security and
cybersecurity attacks increases. As a financial services company, we are continuously subject to
cybersecurity attacks by third parties. Such breaches could lead to shutdowns or disruptions of our systems
and potential unauthorized disclosure of customer data. In addition, vulnerabilities of our external service
providers and other third parties could pose security risks to client information.
As part of our business, we are required to collect, use and store customer, employee and third party data,
including 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 and procedures designed to securely process, transmit and store
confidential information (including PII) and to 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,
risks associated with the management, use and storage of sensitive data 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 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, including advanced security measures, but, despite these
investments, we, our customers and our third party service providers may be vulnerable to security
breaches, phishing attacks, acts of vandalism, 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 breach of security, real or perceived, involving the misappropriation, loss or
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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 breaches of security, cyber-attacks and other types
of unlawful activity, or any resulting disruptions from such events.
In providing services to clients, we manage, utilize and store sensitive and confidential client data, including
personal data. 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 and
other customer data. These laws and regulations are increasing in complexity and number, change
frequently and sometimes conflict. If any person, including any of our employees, negligently disregards or
intentionally breaches our established controls with respect to client data, or otherwise mismanages or
misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement
actions, fines and/or criminal prosecution in one or more jurisdictions.
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 risk management practices may leave us exposed to unidentified or unanticipated risk.
As a financial services company, our business exposes us to certain risks. 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 adopted a governance framework which includes reporting of these metrics and other
significant risks and exposures to management and the Board of Directors. However, our risk management
methods may not predict future risk exposures effectively and may not be effective in identifying and
mitigating our key risks. In addition, some of our risk management methods are based on an evaluation of
information regarding markets, customers and other matters that are based on assumptions that may not be
accurate. A failure to manage our risk effectively could materially and adversely affect our business, results
of operations and financial condition.
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Our corporate debt may restrict how we conduct our business and failure to comply with
the terms of our corporate debt could adversely affect our financial condition and results
of operations.
As of December 31, 2016, 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 covenant
requirements. Our expected annual debt service interest payment is approximately $50 million. The degree
to which we are leveraged could have important consequences, including:
• A 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.
• 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.
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
• Enter into transactions with our shareholders or affiliates
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 also 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 not cure such breach, even if we otherwise meet our debt service obligations. 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.
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
are subject to certain business, economic and competitive conditions, regulatory approval or notification,
and other factors beyond our control. 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,
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the terms of our existing or future debt instruments may restrict us from adopting some of these
alternatives.
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 obtain additional
financing in the future and cause certain of the covenants and restrictions under our credit facility to reapply.
In addition, any future indebtedness could be at a higher interest rate or include covenants that are more
restrictive than our current covenants.
We have a significant deferred tax asset and cannot assure it will be fully realized.
We had net deferred tax assets of $756 million at December 31, 2016. We did not establish a valuation
allowance against our federal net deferred tax assets at December 31, 2016 as we believe 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
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. Additionally, if U.S. federal corporate
tax rates are reduced, our net deferred tax assets would require remeasurement under the new rates, 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.
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 as a federally chartered savings bank, are subject to extensive regulation, supervision
and examination by the OCC and the Federal Reserve and, in the case of E*TRADE Bank, 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.
The Company is currently not subject to certain regulatory requirements that apply to banking organizations
with $50 billion or more in total consolidated assets. Fifty billion dollars in total consolidated assets, which is
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measured in accordance with each applicable regulation, but generally on the basis of the average of the
four most recent quarters, is a meaningful regulatory threshold, as U.S. banking organizations become
subject to a number of additional, and in some cases more stringent, regulatory requirements once they
reach that size. The Company expects these regulations, not all of which have been finalized, to become
applicable as it surpassed $50 billion in total consolidated assets in the first quarter of 2017 and expects to
surpass $50 billion on a four quarter average later this year. 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.
The Dodd-Frank Act 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, the majority of which have now been finalized, but some of which have not yet been
completed. While the substance and full impact of the Dodd-Frank Act may be affected by changes in the
U.S. political landscape and may not be fully known for months or years, 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 and 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 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 2019. 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 Company to conduct capital adequacy tests on its operations. Pursuant
to those regulations, E*TRADE Bank disclosed a summary of these stress test results to the OCC in 2014,
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2015 and 2016. The Company will be required to conduct its first annual stress test using financial
statement data as of December 31, 2016, report the results of the test to the Federal Reserve on or before
July 31, 2017, and disclose a summary of the results in October 2017.
In addition, in April 2016, the U.S. Department of Labor published its final fiduciary 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. These regulations are currently
scheduled to take effect in 2017, but it is possible that implementation may be delayed.
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, litigation,
investigations, damages, penalties or restrictions that could significantly harm our
business.
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, 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.
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. Clearing securities firms, such as E*TRADE Securities, are subject to substantially
more regulatory control and examination than introducing brokers that rely on others to perform clearing
functions. 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.
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 CFTC, 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 the Company is subject to specific capital requirements administered by the
Federal Reserve. Failure to meet minimum capital requirements can trigger certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could harm E*TRADE Bank’s and the
Company's operations and financial statements.
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The Company 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 the Basel III regulatory
framework. The Basel III framework became effective for the Company beginning January 1, 2015 and the
fully phased-in Basel III capital standards will become effective January 1, 2019. 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 at least 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 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 transactions and other factors. Any significant reduction in the Company’s or E*TRADE
Bank’s regulatory capital could result in them 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 the Company or E*TRADE Bank are less than “well capitalized” or “adequately
capitalized” under applicable capital rules, the ability of E*TRADE 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 E*TRADE Bank, 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 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
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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.
Risks Relating to Owning Our Stock
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.
The market price of our common stock may continue to be volatile.
From January 1, 2012 through December 31, 2016, the price per share of our common stock ranged from a
low of $7.08 to a high of $36.04. 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
•
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
• The pricing structure for products and services offered to customers by us or our competitors
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
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•
Limits on the persons who may call special meetings of stockholders
• The prohibition of stockholder action by written consent
• 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
A summary of our significant locations at December 31, 2016 is shown in the following table. Square
footage amounts are net of space that has been sublet or space that is part of a facility restructuring.
Location
Alpharetta, Georgia
Jersey City, New Jersey
Arlington, Virginia
Sandy, Utah
Menlo Park, California
New York, New York
Chicago, Illinois
Approximate Square Footage
260,000
109,000
102,000
85,000
63,000
52,000
37,000
All facilities are leased at December 31, 2016. 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 21—
Commitments, Contingencies and Other Regulatory Matters 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 graph shows the high and low intraday sale prices of our common stock as reported by the
NASDAQ for the periods indicated:
2016
2015
High
Low
High
Low
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
$
29.05
28.14
29.36
36.04
$
$
$
$
19.61
21.52
21.94
27.34
$
$
$
$
28.67
31.48
30.66
30.98
$
$
$
$
21.01
27.24
22.66
24.55
The closing sale price of our common stock as reported on the NASDAQ on February 17, 2017 was $37.17
per share. At that date, there were 671 holders of record of our common stock.
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.
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Issuer Purchases of Equity Securities
The table below shows the timing and impact of our share repurchase program, if applicable, and the
shares withheld from employees to satisfy tax withholding obligations during the three months ended
December 31, 2016 (dollars in millions, except per share amounts):
Period
October 1, 2016 - October 31, 2016
November 1, 2016 - November 30, 2016
December 1, 2016 - December 31, 2016
Total
Total
Number of
Shares
Purchased(1)
966
Average
Price Paid
per Share(2)
28.34
$
3,370
129,484
133,820
$
$
$
27.73
34.59
34.37
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)
— $
— $
— $
—
297.9
297.9
297.9
(1) The 133,820 shares purchased during the three months ended December 31, 2016 were withheld from employees to satisfy tax
withholding obligations associated with restricted shares.
(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.
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, 2011 through December 31, 2016.
E*TRADE | 2016 10-K
26
Table of Contents
12/11
12/12
12/13
12/14
12/15
12/16
E*TRADE Financial Corporation
S&P 500 Index
Dow Jones US Financials Index
100.00
100.00
100.00
112.44
116.00
126.85
246.73
153.58
170.26
304.71
174.60
195.10
372.36
177.01
195.27
435.30
198.18
229.15
ITEM 6.
SELECTED FINANCIAL DATA
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.
(Dollars in millions except per share amounts, shares in thousands):
Year Ended December 31,
Results of Operations:
2016
2015
2014
2013
2012
$
$
$
$
$
$
$
1,148
442
1,941
$
$
$
1,021
424
1,370
$
$
$
(149) $
(40) $
552
1.99
1.98
$
$
$
268
0.92
0.91
$
$
$
961
456
1,704
36
293
1.02
1.00
$
$
$
$
$
$
$
855
420
1,613
143
86
0.30
0.29
$
$
$
$
$
$
$
896
378
1,721
355
(113)
(0.39)
(0.39)
277,789
290,762
288,705
286,991
285,748
(4)%
279,048
295,011
294,103
292,589
285,748
(5)%
Variance
2016 vs.
2015
12%
4%
42%
273%
106%
116%
118%
Net interest income
Commissions
Total net revenue
Provision (benefit) for loan losses
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Weighted average shares—
basic
Weighted average shares—
diluted
(Dollars in millions):
Financial Condition:
2016
2015
2014
2013
2012
Available-for-sale securities
$ 13,892
$ 12,589
$ 12,388
$ 13,592
$ 13,443
December 31,
Variance
2016 vs.
2015
10%
Held-to-maturity securities
$ 15,751
$ 13,013
$ 12,248
$ 10,181
Margin receivables
Loans receivable, net
Total assets
Deposits
Corporate debt
Interest-bearing
Non-interest-bearing
Shareholders’ equity
$
$
6,731
3,551
$
$
7,398
4,613
$
$
7,675
5,979
$
$
$
$
9,540
5,804
21%
(9)%
6,353
8,123
$ 10,099
(23)%
$ 48,999
$ 45,427
$ 45,530
$ 46,280
$ 47,387
$ 31,682
$ 29,445
$ 24,890
$ 25,971
$ 28,393
8%
8%
$
$
$
991
3
6,272
$
$
$
989
8
5,799
$
$
$
1,328
38
5,375
$
$
$
1,726
42
4,856
$
$
$
1,722
—%
43
(63)%
4,904
8%
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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
related notes included in Item 8. Financial Statements and Supplementary Data.
OVERVIEW
The Company's mission is to enhance the financial independence of investors and traders through a
powerful digital offering and professional guidance. Our vision is to be the #1 digital broker and advisor to
traders and investors, known for ease of use and the completeness of offering. Our success in the future
will depend upon, among other things, our ability to execute on our business strategy. Our financial
performance is affected by a number of factors outside of our control, including:
• Customer demand for financial products and services and the impact of actions by our competitors
• Performance, volume and volatility of the equity and capital markets
• 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
• Changes to the rules and regulations governing the financial services industry
• The performance of the residential real estate and credit markets
• Market demand and liquidity in the secondary market for agency mortgage-backed securities
Our net revenue is generated primarily from net interest income, commissions and fees and service
charges. Net interest income is largely impacted by the size of our balance sheet, our balance sheet mix,
and average yields on our assets and liabilities. Net interest income is driven primarily from interest earned
on investment securities and margin receivables, less interest paid on interest-bearing liabilities, including
deposits, customer payables, corporate debt and other borrowings. Net interest income is also earned on
our legacy loan portfolio which we expect to continue to run off in future periods. Commissions revenue is
generated by customer trades and is largely impacted by trade volume and commission rates. Fees and
service charges revenue is mainly impacted by order flow revenue, fees earned on off-balance sheet
customer cash and other assets, and advisor management fees. Our net revenue is offset by non-interest
expenses, the largest of which are compensation and benefits and advertising and market development.
Financial Statement Presentation
Beginning January 1, 2016, we changed our segment reporting structure to align with the manner in which
business performance is reviewed and resource allocation decisions are made. As business performance
assessments and resource allocation decisions are based on consolidated operating margin, we no longer
have separate operating segments and, accordingly, no longer present disaggregated segment financial
results. We also updated the presentation of the consolidated statement of income to reflect how business
performance is measured and prior periods have been reclassified to conform to the current period
presentation:
•
•
Interest expense related to corporate debt and interest income related to corporate cash reclassified
from other income (expense) to net interest income
Losses on early extinguishment of debt, net reclassified from other income (expense) to non-interest
expense
• Other income (expense) reclassified from other income (expense) to gains (losses) on securities and
other, net
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Significant Events
Completed the acquisition of OptionsHouse
• On September 12, 2016, we completed the acquisition of Aperture New Holdings, Inc., the ultimate
parent company of OptionsHouse, an online brokerage, for $725 million. We funded the transaction
through the issuance of fixed-to-floating rate non-cumulative perpetual preferred stock for gross
proceeds of $400 million, and the remainder with existing corporate cash. For additional information,
see Note 2—Business Acquisition.
Increased the amount of customer cash available for balance sheet growth and exceeded
$50 billion in consolidated assets
• We ended 2016 with $13.5 billion of off-balance sheet customer cash available for future balance sheet
growth. In the first quarter of 2017, we crossed $50 billion in total consolidated assets and are
continuing to monitor and prepare for the incremental regulatory and reporting requirements that this
balance sheet growth may require.
E*TRADE Bank to operate at a 7.5% minimum Tier 1 Leverage Ratio
• Effective February 2017, E*TRADE Bank can operate at a 7.5% Tier 1 leverage ratio.
$858 million in dividends were paid from bank and broker-dealer subsidiaries to the parent
company
The key source of corporate cash is dividends from subsidiaries. Dividend activities for the year ended
December 31, 2016 are displayed below (dollars in millions):
Effective October 1, 2016, E*TRADE Clearing was merged into E*TRADE Securities.
Repurchased $452 million of shares of our common stock
• During the year ended December 31, 2016, we repurchased 19 million shares of common stock at an
average price of $23.83 for a total of $452 million. As of December 31, 2016, we have repurchased 20.6
million shares of common stock at an average price of $24.34 for a total of $502 million since we began
repurchasing shares in the fourth quarter of 2015. Due to the OptionsHouse acquisition we did not
repurchase shares under the program in the second half of 2016. We will continue to assess the best
use of corporate cash and anticipate resuming share repurchases in the second half of 2017.
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Key Performance Metrics
Management monitors a number of metrics in evaluating the Company’s performance. The most significant
of these are displayed below along with the percentage variance from the prior period, where applicable,
and including the impact of OptionsHouse from the acquisition date.
Customer Activity Metrics:
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Customer Activity Metrics:
DARTs are the predominant driver of commissions revenue from our customers. DARTs were 164,134,
155,470 and 168,474 for the years ended December 31, 2016, 2015 and 2014, respectively.
Derivative DARTs percentage is the mix of options and futures as a component of total DARTs and a key
driver of commissions revenue. Derivative DARTs represented 26%, 24% and 24% of total DARTs for the
years ended December 31, 2016, 2015 and 2014, respectively.
Average commission per trade is an indicator of changes in our customer mix, product mix and/or product
pricing. Average commission per trade was $10.70, $10.86 and $10.81 for the years ended December 31,
2016, 2015 and 2014, respectively.
Customer margin balances represent credit extended to customers to finance their purchases of securities
by borrowing against securities they own and are a key driver of net interest income. Customer margin
balances were $7.1 billion, $7.4 billion and $7.7 billion at December 31, 2016, 2015 and 2014, respectively.
Customer margin at December 31, 2016 includes $0.4 billion of receivables held by a third party clearing
firm as a result of the OptionsHouse acquisition.
Managed products represent customer assets in our Managed Investment Portfolio, Unified Managed
Account, and Adaptive Portfolio products. Managed products are a driver of fees and service charges
revenue from our customers. Managed products were $3.9 billion, $3.2 billion and $3.1 billion at December
31, 2016, 2015 and 2014, respectively.
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. End of period brokerage accounts were
3.5 million, 3.2 million and 3.1 million and net new brokerage accounts were 249,462, 69,618 and 145,864
for the years ended December 31, 2016, 2015 and 2014, respectively. Our brokerage account attrition rate
was 8.5%, 9.7% and 8.7% for the years ended December 31, 2016, 2015 and 2014, respectively. These
metrics include the impact of the following:
• Net new and end of period brokerage accounts for the year ended December 31, 2016 include 147,761
accounts as a result of the OptionsHouse acquisition.
• Net new and end of period brokerage accounts for the year ended December 31, 2015 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. Excluding the impact of
these items, the brokerage account attrition rate was 8.9% for the year ended December 31, 2015.
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Customer assets are an indicator of the value of our relationship with the customer. An increase generally
indicates that the use of our products and services by existing and new customers is expanding. Changes
in this metric are also driven by changes in the valuations of our customers' underlying securities. Customer
assets were $311.3 billion, $287.9 billion and $290.3 billion at December 31, 2016, 2015 and 2014,
respectively.
Net new brokerage assets are total inflows to new and existing brokerage accounts less total outflows from
closed and existing brokerage accounts. The net new brokerage assets metric is a general indicator of the
use of our products and services by new and existing brokerage customers. Net new brokerage assets
were $13.1 billion, $9.3 billion and $10.9 billion for the years ended December 31, 2016, 2015 and 2014,
respectively. Net new brokerage assets for the year ended December 31, 2016 includes $3.7 billion as a
result of the OptionsHouse acquisition.
Brokerage related cash is an indicator of the level of engagement with our brokerage customers and is a
key driver of net interest income as well as fees and service charges revenue, which includes fees earned
on customer cash held by third parties. Brokerage related cash was $51.4 billion, $41.7 billion and $41.1
billion at December 31, 2016, 2015 and 2014, respectively.
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Company Metrics:
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Company Metrics:
Operating margin is the percentage of net revenue that results in income before income taxes and is an
indicator of the Company's profitability. Operating margin was 43%, 7% and 27% for the years ended
December 31, 2016, 2015 and 2014, respectively.
Adjusted operating margin is a non-GAAP measure that provides useful information about our ongoing
operating performance by excluding the provision (benefit) for loan losses, the loss on termination of
wholesale funding obligations and other losses on early extinguishment of debt, which are not viewed as
key factors governing our investment in the business. Adjusted operating margin was 35%, 31% and 33%
for the years ended December 31, 2016, 2015 and 2014, respectively. See Earnings Overview for a
reconciliation of this non-GAAP measure to the comparable GAAP measure.
Corporate cash is a component of cash and equivalents which represents the primary source of capital
above and beyond the capital deployed in our regulated subsidiaries. Corporate cash was $461 million,
$447 million and $233 million for the years ended December 31, 2016, 2015 and 2014, respectively. 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 assets for leverage capital purposes. E*TRADE
Financial's Tier 1 leverage ratio was 7.8%, 9.0% and 8.1% at December 31, 2016, 2015 and 2014,
respectively. E*TRADE Bank's Tier 1 leverage ratio was 8.8%, 9.7% and 10.6% at December 31, 2016,
2015 and 2014, respectively, and includes the impact of the following:
• Beginning in the first quarter of 2015, E*TRADE Financial and E*TRADE Bank calculated regulatory
capital under the Basel III framework. Prior to 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, commonly known as Basel I.
• E*TRADE Bank's Tier 1 leverage ratio as of December 31, 2015 excludes E*TRADE Securities and
E*TRADE Clearing.
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 measure.
Special mention loan delinquencies are loans between 30 and 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 to ultimately be charged-off. Special mention loan delinquencies were $114 million,
$130 million and $155 million at December 31, 2016, 2015 and 2014, respectively.
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 (TDRs). Allowance for loan losses
were $221 million, $353 million and $404 million at December 31, 2016, 2015 and 2014, respectively.
Interest-earning assets, in conjunction with net interest margin, is an indicator of our ability to generate net
interest income. Average interest-earning assets were $43.3 billion, $41.0 billion and $41.9 billion for the
years ended December 31, 2016, 2015 and 2014, respectively.
Net interest margin is a measure of the net yield on our average interest-bearing assets. Net interest margin
is calculated for a given period by dividing the annualized sum of net interest income by average interest-
bearing assets. Net interest margin was 2.65%, 2.50% and 2.30% for the years ended December 31, 2016,
2015 and 2014, respectively.
Total employees were 3,601, 3,421 and 3,221 at December 31, 2016, 2015 and 2014, respectively.
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EARNINGS OVERVIEW
We generated net income of $552 million, or $1.98 per diluted share, on total net revenue of $1.9 billion for
the year ended December 31, 2016. The following chart provides a reconciliation of net income at
December 31, 2015 to net income at December 31, 2016 (dollars in millions):
The following table sets forth the significant components of the consolidated statement of income (dollars in
millions except per share amounts):
Year Ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
Amount
%
Amount
%
Variance
Variance
Net interest income
Total non-interest income
Total net revenue
Provision (benefit) for loan losses
Total non-interest expense
Income before income tax
expense (benefit)
Income tax expense (benefit)
Net income
$
Diluted earnings per share $
* Percentage not meaningful.
$ 1,148
$ 1,021
$
793
1,941
(149)
1,252
349
1,370
(40)
1,319
838
286
552
1.98
$
$
91
(177)
268
0.91
$
$
961
743
1,704
36
1,216
452
159
293
1.00
$
$
$
127
444
571
(109)
(67)
747
463
284
1.07
12 % $
60
127 %
42 %
273 %
(5)%
821 %
*
106 % $
(394)
(334)
(76)
103
(361)
(336)
(25)
118 % $
(0.09)
6 %
(53)%
(20)%
(211)%
8 %
(80)%
*
(9)%
(9)%
Net income increased 106% to $552 million, or $1.98 per diluted share for the year ended December 31,
2016, compared to the same period in 2015. Net income decreased 9% to $268 million, or $0.91 per diluted
share for the year ended December 31, 2015, compared to the same period in 2014. The increase from
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2015 to 2016 resulted primarily from the $413 million pre-tax charge on the termination of legacy wholesale
funding obligations recognized in 2015. This pre-tax charge included $43 million of losses on early
extinguishment of debt and $370 million of losses that were reclassified from accumulated other
comprehensive loss related to cash flow hedges into the gains (losses) on securities and other, net line
item. Benefit for loan losses increased to $(149) million in 2016 from $(40) million in 2015, compared to a
provision for loan losses of $36 million in 2014. The year ended December 31, 2015 also included a $220
million income tax benefit resulting from the settlement of an IRS examination and a $73 million pre-tax loss
on early extinguishment of corporate debt.
Net Revenue
The components of net revenue and the resulting variances are as follows (dollars in millions):
Year Ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
Amount
%
Amount
%
Variance
Variance
Net interest income
Commissions
Fees and service charges
Principal transactions
Gains (losses) on securities and
other, net
Other revenue
Total non-interest income
$
1,148
$
1,021
$
442
268
—
42
41
793
424
210
—
(324)
39
349
961
456
200
10
39
38
743
Total net revenue
$
1,941
$
1,370
$
1,704
$
* Percentage not meaningful.
Net Interest Income
$
127
12% $
18
58
—
366
2
444
571
4%
28%
*
*
5%
127%
42% $
60
(32)
10
(10)
(363)
1
(394)
(334)
6 %
(7)%
5 %
(100)%
*
3 %
(53)%
(20)%
Net interest income increased 12% to $1.1 billion for the year ended December 31, 2016, compared to the
same period in 2015 and increased 6% to $1.0 billion for the year ended December 31, 2015, compared to
the same period in 2014. Net interest income is earned primarily through investment securities, margin
receivables and our legacy loan portfolio, which will continue to run off in future periods, offset by funding
costs. The legacy wholesale funding obligations termination in 2015 significantly reduced our funding costs
and improved our ability to generate net interest income.
The following table presents average balance sheet data and interest income and expense data, as well as
the related net interest margin, yields and rates prepared on the basis required by the SEC’s Industry Guide
3, "Statistical Disclosure by Bank Holding Companies" (dollars in millions):
E*TRADE | 2016 10-K
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Table of Contents
Year Ended December 31, (1)
2016
2015
2014
Average
Balance
Interest
Inc./Exp.
Average
Yield/
Cost
Average
Balance
Interest
Inc./Exp.
Average
Yield/
Cost
Average
Balance
Interest
Inc./Exp.
Average
Yield/
Cost
Cash and equivalents
$ 1,700
$
Cash required to be segregated
under federal or other regulation
Available-for-sale securities
Held-to-maturity securities
Margin receivables
Loans (2)
Broker-related receivables and other
Subtotal interest-earning assets
Other interest revenue (3)
Total interest-earning assets
Total non-interest-earning assets (4)
1,553
13,265
15,217
6,592
4,351
594
43,272
—
43,272
4,864
Total assets
$ 48,136
7
6
266
425
249
191
1
1,145
88
0.41% $ 1,728
$
0.36%
2.01%
2.79%
3.77%
4.39%
0.16%
2.65%
425
12,541
12,201
7,884
5,651
527
40,957
—
1,233
2.85%
40,957
4,512
$ 45,469
Sweep deposits
Savings deposits
Other deposits
Customer payables
Broker-related payables and other
Other borrowings (5)
Corporate debt
$ 26,088
$
3,227
2,018
7,221
1,286
416
994
Subtotal interest-bearing liabilities
41,250
Other interest expense (6)
Total interest-bearing liabilities
Total non-interest-bearing liabilities (7)
Total liabilities
Total shareholders' equity
—
41,250
954
42,204
5,932
Total liabilities and shareholders'
equity
$ 48,136
3
—
—
5
—
18
54
80
5
85
0.01% $ 20,638
$
0.01%
0.03%
0.07%
0.00%
4.32%
5.41%
0.19%
3,534
1,977
6,435
1,759
3,500
1,076
38,919
—
0.21%
38,919
894
39,813
5,656
$ 45,469
3
1
245
346
276
230
3
1,104
112
1,216
4
—
—
5
—
117
59
185
9
194
0.18% $ 1,752
$
0.15%
736
1.95%
12,761
2.84%
11,288
3.50%
4.06%
0.61%
7,446
7,298
629
2.70%
41,910
—
2
1
289
328
264
297
3
1,184
96
0.11%
0.10%
2.26%
2.90%
3.55%
4.07%
0.46%
2.82%
2.97%
41,910
1,280
3.05%
3,910
$ 45,820
0.02% $ 19,168
$
0.01%
0.03%
0.07%
0.00%
3.32%
5.63%
4,009
1,994
6,417
1,518
5,281
1,734
0.49%
40,121
—
0.50%
40,121
538
40,659
5,161
$ 45,820
7
1
—
8
—
188
113
317
1
318
0.03%
0.01%
0.04%
0.13%
0.00%
3.55%
6.52%
0.79%
0.79%
Excess of interest earning assets
over interest bearing liabilities/net
interest income/net interest margin (8)
$ 2,022
$
1,148
2.65% $ 2,038
$
1,022
2.50% $ 1,789
$
962
2.30%
(1) Beginning in 2016, we transitioned to utilizing net interest margin as the key metric for measuring our performance in
leveraging our bank structure to effectively monetize brokerage relationships. Interest expense related to corporate debt and
interest income related to corporate cash are presented within net interest income. Prior periods have been reclassified to
conform with current period presentation.
(2) Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual loans are recognized
on a cash basis in interest income until it is doubtful that full payment will be collected, at which point payments are applied to
principal.
(3) Represents interest income on securities loaned.
(4) Non-interest earning assets consist of property and equipment, net, goodwill, other intangibles, net, deferred tax assets, net
and other assets that do not generate interest income.
(5)
In September 2015, we terminated $4.4 billion of legacy wholesale funding obligations.
(6) Represents interest expense on securities borrowed.
(7) Non-interest bearing liabilities consist of other liabilities that do not generate interest expense.
(8) The taxable equivalent adjustment to reconcile to net interest income was less than $1 million for the year ended December
31, 2016 and $1 million for both of the years ended December 31, 2015 and 2014.
E*TRADE | 2016 10-K
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Ratio of interest-earning assets to interest-bearing liabilities
Return on average:
Total assets
Total shareholders’ equity
Average total shareholders’ equity to average total assets
Year Ended December 31,
2016
2015
2014
104.90%
105.24%
104.46%
1.15%
9.30%
0.59%
4.75%
0.64%
5.69%
12.32%
12.44%
11.26%
Average interest-earning assets increased 6% to $43.3 billion for the year ended December 31, 2016,
compared to the same period in 2015. The fluctuation in interest-earning assets is generally driven by
changes in interest-bearing liabilities, primarily deposits and customer payables. Average interest-bearing
liabilities increased 6% to $41.3 billion for the year ended December 31, 2016, compared to the same
period in 2015. The increase was primarily due to increased deposits as a result of transferring customer
cash held by third parties to our balance sheet, partially offset by the termination of our legacy wholesale
funding obligations during 2015. For additional information on our balance sheet growth and customer cash
held by third parties, see Balance Sheet Overview.
Net interest margin increased 15 basis points to 2.65% for the year ended December 31, 2016, compared
to the same period in 2015. Net interest margin is driven by the mix of asset and liability average balances
and the interest rates earned or paid on those balances. The increase was primarily due to lower borrowing
costs resulting from the termination of legacy wholesale funding obligations during 2015. The increase was
partially offset by lower rates earned on reinvesting funds in securities as our legacy loan portfolio continues
to pay down. Margin balances also decreased 16% for the year ended December 31, 2016, compared to
the same period in 2015; however, the impact of the margin receivables decrease was partially offset by
increased rates earned on margin due to the increase in market interest rates and changes in customer
mix.
Average interest-earning assets decreased 2% to $41.0 billion for the year ended December 31, 2015,
compared to the same period in 2014. Average interest-bearing liabilities decreased 3% to $38.9 billion for
the year ended December 31, 2015, compared to the same period in 2014. Net interest margin increased
20 basis points to 2.50% for the year ended December 31, 2015, compared to the same period in 2014.
The increase was primarily due to lower borrowing costs resulting from the termination of legacy wholesale
funding obligations and the refinancing and reduction of corporate debt during 2015.
Commissions
Commissions revenue increased 4% to $442 million for the year ended December 31, 2016, compared to
the same period in 2015. The main factors that affect commissions revenue are DARTs, average
commission per trade and the number of trading days. DARTs volume increased 6% to 164,134 for the year
ended December 31, 2016, compared to the same period in 2015, mainly driven by increased trading
activity related to OptionsHouse. Derivative DARTs represented 26% of trading volume for the year ended
December 31, 2016, compared to 24% of trading volume for the same period in 2015. Average commission
per trade decreased 1% to $10.70 for the year ended December 31, 2016, compared to the same period in
2015. Average commission per trade is impacted by customer mix, differing commission rates on various
trade types (e.g. equities, derivatives, stock plan and mutual funds), and the lower price structure for
OptionsHouse customers.
Commissions revenue decreased 7% to $424 million for the year ended December 31, 2015, compared to
the same period in 2014. DART volume decreased 8% to 155,470 for the year ended December 31, 2015,
compared to the same period in 2014. Derivative DARTs as a percentage of total DARTs represented 24%
of trading volume for both the years ended December 31, 2015 and 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.
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Fees and Service Charges
The components of fees and service charges and the resulting variances are as follows (dollars in millions):
Year Ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
Amount
%
Amount
%
Variance
Variance
Order flow revenue
$
96
$
85
$
92
$
Money market funds and sweep
deposits revenue(1)
Mutual fund service fees
Advisor management fees
Foreign exchange revenue
Reorganization fees
Other fees and service charges
50
36
28
21
16
21
23
27
27
15
12
21
14
23
23
16
8
24
Total fees and service charges
$
268
$
210
$
200
$
11
27
9
1
6
4
—
58
13% $
(7)
(8)%
117%
33%
4%
40%
33%
—%
28% $
9
4
4
(1)
4
(3)
10
64 %
17 %
17 %
(6)%
50 %
(13)%
5 %
(1)
Includes revenue earned on average customer cash held by third parties based on the federal funds rate or LIBOR plus a
negotiated spread or other contractual arrangements with the third party institutions.
Fees and service charges increased 28% to $268 million for the year ended December 31, 2016, compared
to the same period in 2015, and increased 5% to $210 million for the year ended December 31, 2015,
compared to the same period in 2014. The increases in fees and services charges in both periods were
primarily driven by the impact of increased market interest rates on customer cash held by third parties. The
increase in rates for the year ended December 31, 2016 compared to the year ended December 31, 2015
was partially offset by a lower average balance. In addition, during 2016, fees and service charges
benefited from increased order flow revenue from OptionsHouse trading activity and higher revenue from
foreign exchange fees earned on stock plan activity. Mutual fund service fees increased in both 2016 and
2015 due to higher rates. Fees and service charges may decline in future periods as we continue to transfer
customer cash held by third parties onto our balance sheet.
Gains (Losses) on Securities and Other, Net
The components of gains (losses) on securities and other, net and the resulting variances are as follows
(dollars in millions):
Year Ended December 31,
Variance
2016 vs. 2015
Variance
2015 vs. 2014
2016
2015
2014
Amount
%
Amount
%
$
— $
(370) $
— $
370
(100)% $
(370)
*
54
(1)
53
(6)
(5)
58
(20)
38
(1)
9
42
—
42
(10)
(4)
19
15
(5)
(7)%
(95)%
39 %
500 %
7
(14)
(156)%
16
(20)
(4)
9
2
38 %
*
(10)%
(90)%
29 %
$
42
$
(324) $
39
$
366
*
$
(363)
*
Reclassification of deferred losses on
cash flow hedges
Gains on available-for-sale securities,
net:
Gains on available-for-sale securities
Losses on available-for-sale securities
Subtotal
Hedge ineffectiveness
Equity method investment income (loss)
and other
Gains (losses) on securities and
other, net
*
Percentage not meaningful.
Gains (losses) on securities and other, net was $42 million for the year ended December 31, 2016,
compared to $(324) million for the same period in 2015. During the year ended December 31, 2016
increased net gains on the sale of available-for-sale agency securities were partially offset by losses on
hedge ineffectiveness and equity method investments. Gains (losses) on securities and other, net for the
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year ended December 31, 2015 included $370 million of losses reclassified from accumulated other
comprehensive loss related to cash flow hedges as a result of the termination of legacy wholesale funding
obligations during 2015. Gains (losses) on securities and other, net was $39 million for the year ended
December 31, 2014 which 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 $149 million for the year ended December 31, 2016, compared
to a benefit of $40 million for the same period in 2015 and a provision of $36 million for the same period in
2014. The current period benefit of $149 million includes the impact of updated expectations based on the
sustained outperformance of a substantial volume of high-risk HELOCs, which resulted in a $25 million
decrease to the allowance as of December 31, 2016. Both the current period benefit and the benefit for loan
losses for the year ended December 31, 2015 reflected recoveries in excess of prior expectations, including
recoveries of previous charge-offs that were not included in our loss estimates, as well as payoffs on loans
converting to amortizing. The benefit for loan losses during the year ended December 31, 2015 reflected a
decrease in the allowance for loan losses that was partially offset by the impact of enhancements to our
modeling practices. 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. For additional information on management's estimate of the allowance for loan losses, see
Concentrations of Credit Risk and Summary of Critical Accounting Policies and Estimates.
Non-Interest Expense
The components of non-interest expense and the resulting variances are as follows (dollars in millions):
Year Ended December 31,
2016 vs. 2015
2015 vs. 2014
2016
2015
2014
Amount
%
Amount
%
Variance
Variance
Compensation and benefits
$
Advertising and market development
Clearing and servicing
Professional services
Occupancy and equipment
Communications
Depreciation and amortization
FDIC insurance premiums
Amortization of other intangibles
Restructuring and acquisition-related
activities
Losses on early extinguishment of debt,
net
Other non-interest expenses
$
501
131
105
97
98
87
79
25
23
35
—
71
$
466
124
95
103
88
90
81
41
20
17
112
82
$
412
120
94
112
79
71
78
79
22
8
71
70
Total non-interest expense
$ 1,252
$ 1,319
$ 1,216
$
35
7
10
(6)
10
(3)
(2)
(16)
3
8 % $
6 %
11 %
(6)%
11 %
(3)%
(2)%
(39)%
15 %
18
106 %
(112)
(100)%
54
4
1
(9)
9
19
3
(38)
(2)
9
41
12
13 %
3 %
1 %
(8)%
11 %
27 %
4 %
(48)%
(9)%
113 %
58 %
17 %
8 %
(11)
(67)
(13)%
(5)% $
103
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Compensation and Benefits
Compensation and benefits increased 8% to $501 million for the year ended December 31, 2016,
compared to the same period in 2015, and increased 13% to $466 million for the year ended December 31,
2015, compared to the same period in 2014. Employee headcount increased 5% during 2016 and 6%
during 2015 as we hired additional customer service professionals and financial consultants consistent with
our key business objective of accelerating growth of the core brokerage business. Headcount during 2016
was also impacted by the acquisition of OptionsHouse. Executive severance expense of $6 million was
recognized during both the years ended December 31, 2016 and 2015. The impact of increased headcount
for the year ended December 31, 2016 was partially offset by the reversal of share-based compensation
and other incentive compensation that will not vest due to the Company's restructuring activities during the
second half of 2016. For additional information, see Note 3—Restructuring and Acquisition-Related
Activities.
Advertising and Market Development
Advertising and market development increased 6% to $131 million for the year ended December 31, 2016,
compared to the same period in 2015. The increase was primarily due to investments to drive customer
acquisition and deepen engagement during the year ended December 31, 2016.
Clearing and Servicing
Clearing and servicing expense increased 11% to $105 million for the year ended December 31, 2016,
compared to the same period in 2015. The increase was primarily related to higher trading volumes, mutual
fund activities, expenses related to customer cash held by third parties and OptionsHouse activities.
Occupancy and Equipment
Occupancy and equipment expense increased 11% to $98 million for the year ended December 31, 2016,
compared to the same period in 2015, and increased 11% to $88 million for the year ended December 31,
2015, compared to the same period in 2014. The increases for both periods were primarily driven by higher
facilities expenses and increased software licensing costs.
Communications
Communications expense decreased 3% to $87 million for the year ended December 31, 2016, compared
to the same period in 2015, and increased 27% to $90 million for the year ended December 31, 2015,
compared to the same period in 2014. The decrease for the year ended December 31, 2016 and the
increase for the year ended December 31, 2015 was primarily driven by third party contract charges of $12
million recognized in 2015. The decrease for the year ended December 31, 2016 was partially offset by
increased costs associated with the acquisition of OptionsHouse.
FDIC Insurance Premiums
FDIC insurance premiums decreased 39% to $25 million for the year ended December 31, 2016, compared
to the same period in 2015, and decreased 48% to $41 million for the year ended December 31, 2015,
compared to the same period in 2014. The decreases were driven by lower rate assessments due to
continued improvement in our overall risk profile compared to the same period in prior years. The year
ended December 31, 2016 also reflected the impact of the FDIC's DIF assessment changes which included
decreases to the initial assessment rates that were partially offset by the surcharge.
Restructuring and Acquisition-Related Activities
Restructuring and acquisition-related activities expense increased 106% to $35 million for the year ended
December 31, 2016, compared to the same period in 2015. Restructuring and acquisition-related activities
during the year ended December 31, 2016 reflected approximately $28 million of restructuring costs and $7
million of expense related to the OptionsHouse acquisition. The restructuring costs for the year ended
December 31, 2016 primarily related to severance charges from the realignment of our core brokerage
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business and a focused review of our organizational structure and expenses. These restructuring activities
are expected to eliminate approximately $21 million of future annual expenses, primarily compensation and
benefits. We expect to incur additional restructuring costs in the future as we complete the integration of
OptionsHouse by the third quarter of 2017. For additional information, see Note 3—Restructuring and
Acquisition-Related Activities.
Restructuring and acquisition-related activities expense increased 113% to $17 million for the year ended
December 31, 2015, compared to the same period in 2014 and included the shutdown of certain of our
international operations, as well as $6 million of 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.
Losses on Early Extinguishment of Debt, Net
There were no losses on early extinguishment of debt, net for the year ended December 31, 2016,
compared to $112 million for the year ended December 31, 2015 and $71 million for the year ended
December 31, 2014. The $112 million net loss on early extinguishment of debt during the year ended
December 31, 2015 included a $73 million loss on the redemption of 6 3/8% Senior Notes during the first
quarter and a $43 million loss on the termination of legacy wholesale funding obligations during the third
quarter, offset by a $4 million gain on the extinguishment of certain trust preferred securities. The $71
million loss on early extinguishment of debt for the year ended December 31, 2014 included a $59 million
loss associated with the redemption of 6 3/4% and 6% Senior Notes and a $12 million loss resulting from the
early extinguishment of repurchase agreements.
Other Non-Interest Expenses
Other non-interest expenses decreased 13% to $71 million for the year ended December 31, 2016,
compared to the same period in 2015 and increased 17% to $82 million for the year ended December 31,
2015 compared to the same period in 2014. The year ended December 31, 2015 included a $9 million
expense related to a third party contract amendment executed during the second quarter.
Operating Margin
Operating margin was 43% for the year ended December 31, 2016, compared to 7% for the same period in
2015. Adjusted operating margin, a non-GAAP measure, was 35% for the year ended December 31, 2016,
compared to 31% for the same period in 2015.
Adjusted operating margin is a non-GAAP measure calculated by dividing adjusted income before income
taxes by adjusted total net revenue. Adjusted income before income taxes excludes the loss on termination
of legacy wholesale funding obligations recognized in the gains (losses) on securities and other, net line
item, provision (benefit) for loan losses and the losses on early extinguishment of debt, net line item. The
following table provides a reconciliation of adjusted income before income tax expense and adjusted
operating margin, non-GAAP measures, to the most directly comparable GAAP measures (dollars in
millions):
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Income before income tax expense (benefit) /
operating margin
Add back impact of pre-tax items:
Loss included in Gains (losses) on securities
and other, net
Provision (benefit) for loan losses
Losses on early extinguishment of debt,
net(1)
Subtotal
Adjusted income before income tax expense
(benefit) / adjusted operating margin
2016
Year Ended December 31,
2015
2014
Amount
Operating
Margin % Amount
Operating
Margin % Amount
Operating
Margin %
$
838
43%
$
91
7%
$
452
27%
—
(149)
—
(149)
370
(40)
112
442
—
36
71
107
$
689
35%
$
533
31%
$
559
33%
(1) The year ended December 31, 2015 includes $43 million losses on early extinguishment of debt related to the termination of
legacy wholesale funding obligations, partially offset by a $4 million gain on the extinguishment of certain trust preferred
securities, and $73 million losses on early extinguishment of debt. The year ended December 31, 2014 includes losses on
early extinguishment of debt of $59 million related to the refinance of our corporate debt and $12 million related to the early
extinguishment of repurchase agreements.
Adjusted total net revenue excludes the loss on termination of legacy wholesale funding obligations from
total net revenue. The following table provides a reconciliation of adjusted total net revenue, a non-GAAP
measure, to the most directly comparable GAAP measure (dollars in millions):
Total net revenue
Add back impact of termination of legacy wholesale funding
obligations:
Loss included in Gains (losses) on securities and other, net
Adjusted total net revenue
$
$
Income Tax Expense (Benefit)
Year Ended December 31,
2016
2015
2014
1,941
$
1,370
$
1,704
—
370
1,941
$
1,740
$
—
1,704
Income tax expense (benefit) was $286 million, $(177) million, and $159 million for the years ended
December 31, 2016, 2015, and 2014, respectively. The effective tax rate was 34%, (195%), and 35% for the
same periods.
The effective tax rate of 34% for the year ended December 31, 2016 was primarily driven by a $25 million
tax benefit recognized during 2016 related to the release of valuation allowances against certain state
deferred tax assets. Effective January 1, 2016, we elected to treat E*TRADE Securities and E*TRADE
Clearing as single member LLCs for tax purposes. The election to be treated as single member LLCs, in
addition to the future income projections at the combined broker-dealer, will result in the utilization of certain
state deferred tax assets, primarily state NOLs, against which we had previously recorded valuation
allowances. The effective tax rate of (195%) for the year ended December 31, 2015 was primarily driven by
the settlement of 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 net deferred tax assets. For
additional information, see Note 16—Income Taxes.
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BALANCE SHEET OVERVIEW
The following table sets forth the significant components of the consolidated balance sheet (dollars in
millions):
December 31,
Variance
2016 vs. 2015
2016
2015
Amount
%
Assets:
Cash and equivalents
Segregated cash
Securities(1)
Margin receivables
Loans receivable, net
Receivables from brokers, dealers and
clearing organizations(2)
Goodwill and other intangibles, net
Deferred tax assets, net
Other(3)
Total assets
Liabilities and shareholders’ equity:
Deposits
Customer payables
Payables to brokers, dealers and clearing
organizations(4)
Other borrowings
$
$
Corporate debt
Other liabilities
Total liabilities
Shareholders’ equity
$
1,950
$
2,233
$
1,460
29,643
6,731
3,551
1,056
2,690
756
1,162
1,057
25,602
7,398
4,613
520
1,966
1,033
1,005
31,682
$
29,445
$
8,159
983
409
994
500
42,727
6,272
6,544
1,576
491
997
575
39,628
5,799
48,999
$
45,427
$
3,572
(283)
403
4,041
(667)
(1,062)
536
724
(277)
157
2,237
1,615
(593)
(82)
(3)
(75)
3,099
473
3,572
(13)%
38 %
16 %
(9)%
(23)%
103 %
37 %
(27)%
16 %
8 %
8 %
25 %
(38)%
(17)%
— %
(13)%
8 %
8 %
8 %
Total liabilities and shareholders’ equity
$
48,999
$
45,427
$
(1)
Includes balance sheet line items available-for-sale and held-to-maturity securities.
(2)
Includes deposits paid for securities borrowed of $774 million and $120 million as of December 31, 2016 and 2015,
respectively.
(3)
Includes balance sheet line items property and equipment, net and other assets.
(4)
Includes deposits received for securities loaned of $926 million and $1.5 billion as of December 31, 2016 and 2015,
respectively.
Cash and Equivalents
Cash and equivalents decreased 13% to $2.0 billion during the year ended December 31, 2016 and
includes corporate cash of $461 million as of December 31, 2016. We used corporate cash along with the
gross proceeds from the issuance of $400 million of fixed-to-floating rate non-cumulative preferred stock to
fund the acquisition of OptionsHouse in the third quarter of 2016. In addition, corporate cash was used for
repurchases of common stock. The decrease in total cash and equivalents also reflects purchases of
investment securities during the year ended December 31, 2016. For additional information on our use of
cash and equivalents, including corporate cash, see Liquidity and Capital Resources.
Segregated Cash
Cash required to be segregated under federal or other regulations increased 38% to $1.5 billion during the
year ended December 31, 2016. The level of segregated cash is driven largely by customer payables and
securities lending balances we hold as liabilities compared with the amount of margin receivables and
securities borrowed balances we hold as assets. The excess represents customer cash that we are
required by our regulators to segregate for the exclusive benefit of our brokerage customers. At December
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31, 2016, $500 million of reverse repurchase agreements between E*TRADE Securities and E*TRADE
Bank, representing investments that are required to be segregated under federal or other regulations by
E*TRADE Securities, were eliminated in consolidation.
Securities
Available-for-sale and held-to-maturity securities are summarized as follows (dollars in millions):
December 31,
Variance
2016 vs. 2015
2016
2015
Amount
%
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities
$
12,634
$
11,763
$
Other debt securities
Total debt securities
Publicly traded equity securities(1)
Total available-for-sale securities
Held-to-maturity securities:
Agency mortgage-backed securities
Other debt securities
Total held-to-maturity securities
Total investments in securities
1,251
13,885
7
794
12,557
32
13,892
$
12,589
$
12,868
$
10,353
$
2,883
15,751
29,643
$
$
2,660
13,013
25,602
$
$
$
$
$
$
(1) Consists of Community Reinvestment Act investments in a mutual fund.
871
457
1,328
(25)
1,303
2,515
223
2,738
4,041
7 %
58 %
11 %
(78)%
10 %
24 %
8 %
21 %
16 %
Securities represented 60% and 56% of total assets at December 31, 2016 and 2015, 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, 2016 was primarily due
to net purchases of investment securities as a result of increased sweep deposits and the reinvestment of
funds as our loan portfolios pay down. Securities with a fair value of approximately $492 million were
transferred from available-for-sale to held-to-maturity during the year ended December 31, 2016 pursuant to
an evaluation of our investment strategy and an assessment by management about our intent and ability to
hold those particular securities until maturity. See Note 17—Shareholders' Equity for additional information.
Margin Receivables
Margin receivables decreased 9% to $6.7 billion during the year ended December 31, 2016. The decrease
in margin receivables was primarily driven by overall investor sentiment during the period, lowering demand
for additional margin lending. Average margin receivables were $6.6 billion for the year ended December
31, 2016.
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Loans Receivable, Net
Loans receivable, net are summarized as follows (dollars in millions):
December 31,
Variance
2016 vs. 2015
2016
2015
Amount
%
One- to four-family
$
1,950
$
2,488
$
Home equity
Consumer
Total loans receivable
Unamortized premiums, net
Allowance for loan losses
1,556
250
3,756
16
(221)
2,114
341
4,943
23
(353)
Total loans receivable, net $
3,551
$
4,613
$
(538)
(558)
(91)
(1,187)
(7)
132
(1,062)
(22)%
(26)%
(27)%
(24)%
(30)%
(37)%
(23)%
Loans receivable, net decreased 23% to $3.6 billion during the year ended December 31, 2016. We plan on
reducing balance sheet risk through legacy loan portfolio run-off for the foreseeable future. As our portfolio
ages, we continue to gather substantive performance history on loan conversions from interest-only to
amortizing and assess the economic environment and the value of our portfolio in the marketplace. While it
is our intention 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 Concentrations of Credit Risk.
Goodwill and Other Intangibles, net
Goodwill and other intangibles, net increased 37% to $2.7 billion during the year ended December 31,
2016. The increase was driven by $578 million and $169 million in goodwill and other intangible assets,
respectively, recorded in connection with the OptionsHouse acquisition. For additional information, see Note
2—Business Acquisition.
Deferred Tax Assets, net
Our net deferred tax assets were $756 million and $1.0 billion at December 31, 2016 and 2015,
respectively. The decrease was primarily driven by a decrease in NOLs from current year earnings, and the
reduction of reserves and allowances driven by the recognition of loan losses for tax purposes. As of
December 31, 2016 and 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 these
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 two years. We maintain a valuation
allowance for certain of our other deferred tax assets as we have concluded that it is more likely than not
that they will not be realized. At December 31, 2016, we had total state deferred tax assets, net of federal
benefit, of approximately $138 million related to our state net operating loss carryforwards and temporary
differences with a valuation allowance of $18 million against such deferred tax assets. At December 31,
2016, we also had foreign deferred tax assets, net of federal benefit, of approximately $18 million with a
valuation allowance of $17 million against such deferred tax assets as we have historical tax losses in most
of these foreign countries.
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Deposits
Deposits are summarized as follows (dollars in millions):
Sweep deposits
Savings deposits
Other deposits
Total deposits
December 31,
Variance
2016 vs. 2015
2016
2015
Amount
%
$
$
26,362
$
24,018
$
3,185
2,135
3,357
2,070
2,344
(172)
65
31,682
$
29,445
$
2,237
10 %
(5)%
3 %
8 %
Deposits represented 74% of total liabilities at both December 31, 2016 and 2015. At December 31, 2016,
approximately 90% of our customer deposits were covered by FDIC insurance.
The majority of the deposits balance, specifically sweep deposits, is included in brokerage related cash,
which is reported as a customer activity metric. Total brokerage related cash is summarized as follows
(dollars in millions):
Sweep deposits(1)
Customer payables
Subtotal
Customer cash held by third parties(2)
Total brokerage related cash
December 31,
Variance
2016 vs. 2015
2016
2015
Amount
%
$
$
26,362
$
24,018
$
8,159
34,521
16,848
6,544
30,562
11,173
51,369
$
41,735
$
2,344
1,615
3,959
5,675
9,634
10 %
25 %
13 %
51 %
23 %
(1) Sweep deposits are held at bank subsidiaries and are included in the deposits line item on our consolidated balance sheet.
(2) Customer cash held by third parties is not reflected on our consolidated balance sheet and are not immediately available for
liquidity purposes.
We offer an extended insurance sweep deposit account (ESDA) program to our brokerage customers. The
ESDA program utilizes our bank subsidiaries, in combination with additional third party program banks, to
allow customers the ability to have aggregate deposits they hold in the ESDA program insured up to
$1,250,000 for each category of legal ownership. As of December 31, 2016, approximately 98% of sweep
deposits were in the ESDA program.
Customer payables increased 25% to $8.2 billion during the year ended December 31, 2016, primarily
driven by net sales of securities in brokerage customer accounts.
Customer cash held by third parties is maintained at unaffiliated financial institutions and a third party
clearing firm. The components of customer cash held by third parties are summarized as follows (dollars in
millions):
Sweep deposits at unaffiliated financial institutions
Customer cash held at third party clearing firm(1)
Municipal funds and other
Money market fund
Customer cash held by third parties
December 31,
Variance
2016 vs. 2015
2016
2015
Amount
%
$
$
14,943
$
5,818
$
1,634
271
—
—
3,599
1,756
9,125
1,634
(3,328)
(1,756)
16,848
$
11,173
$
5,675
157 %
100 %
(92)%
(100)%
51 %
(1) Represents OptionsHouse's customer cash held by third party.
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During the year ended December 31, 2016, we transferred a total of $2.8 billion of customer cash held at
third party institutions back onto our balance sheet. This amount included $1.6 billion of customer balances
converted from the money market fund product held by third parties to our ESDA program during the first
quarter of 2016. During the third quarter of 2016, we converted $4.1 billion of customer cash to our ESDA
program. These conversions, along with the acquisition of OptionsHouse, increased the total amount of
customer cash that will be available to bring back on to our balance sheet to approximately $13.5 billion. In
the first quarter of 2017 we exceeded $50 billion in total consolidated assets.
Other Borrowings
Other borrowings, which includes securities sold under agreements to repurchase and TRUPs, are
summarized as follows (dollars in millions):
Trust preferred securities
Repurchase agreements
Total other borrowings
December 31,
Variance
2016 vs. 2015
2016
2015
Amount
%
$
$
409
$
409
$
—
82
409
$
491
$
—
(82)
(82)
— %
(100)%
(17)%
Other borrowings represented 1% of total liabilities at both December 31, 2016 and 2015.
Corporate Debt
Corporate debt is summarized as follows (dollars in millions):
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
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, 2016
Face Value
Discount
Net
$
540
460
1,000
3
1,003
$
(5) $
(4)
(9)
—
(9) $
December 31, 2015
Face Value
Discount
Net
540
460
1,000
8
1,008
$
$
(6) $
(5)
(11)
—
(11) $
535
456
991
3
994
534
455
989
8
997
During the years ended December 31, 2016 and 2015, $5 million and $30 million of convertible debentures
were converted into 0.5 million and 2.9 million shares of common stock, respectively.
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Shareholders’ Equity
The activity in shareholders’ equity during the year ended December 31, 2016 is summarized as follows
(dollars in millions):
Common Stock /
Additional Paid-
In
Capital
Preferred
Stock
Accumulated Deficit /
Other
Comprehensive Loss
Total
Beginning balance, December 31, 2015
$
— $
7,359
$
(1,560) $
5,799
Net income
Net change from available-for-sale
securities
Issuance of preferred stock
Repurchases of common stock
Other(1)
—
—
394
—
—
—
—
—
(452)
17
552
(38)
—
—
—
Ending balance, December 30, 2016
$
394
$
6,924
$
(1,046) $
(1) Other includes employee share-based compensation and conversions of convertible debentures.
552
(38)
394
(452)
17
6,272
On August 25, 2016, we issued 400,000 shares of Series A fixed-to-floating rate non-cumulative perpetual
preferred stock for gross proceeds of $400 million. Net proceeds, after issuance cost, were approximately
$394 million. For additional information, see Note 17—Shareholders' Equity.
LIQUIDITY AND CAPITAL RESOURCES
We have established liquidity and capital policies to support the successful execution of our business
strategy, 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
Securities as well as by the principal and interest due on our corporate debt and the amount of dividend
payments on our preferred stock. 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. Management does not consider the potential for loans by E*TRADE Bank to the parent company
and its other non-bank subsidiaries to be sources of liquidity as they would be subject to various
quantitative, arm’s length, collateralization, capital and other requirements.
Parent Company Liquidity
The parent company's primary source of liquidity is corporate cash. Corporate cash, a non-GAAP measure,
is a component of cash and equivalents; see the consolidated statement of cash flows within Item 8.
Financial Statements and Supplementary Data for information on cash and equivalents activity. We define
corporate cash as cash held at the parent company and certain subsidiaries, not including bank and broker-
dealer subsidiaries, that can be distributed to the parent company without any regulatory approval or
notification. E*TRADE Bank and its subsidiaries require regulatory approval prior to the payment of certain
dividends to the parent company. Our broker-dealer subsidiaries can pay dividends to the parent company
with proper regulatory notifications.
We believe corporate cash is a useful measure of the parent company’s liquidity as it is the primary source
of capital above and beyond the capital deployed in our regulated subsidiaries. Corporate cash can
fluctuate in any given quarter and is impacted primarily by the following:
• Dividends from subsidiaries
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• Non-cumulative preferred stock dividends
• Acquisitions and investments
• Share repurchases
• Debt service costs
• Tax payments and the reimbursement from the parent company's subsidiaries for the use of its deferred
tax assets
• Other overhead cost sharing arrangements
The following chart provides a roll forward of corporate cash at December 31, 2015 to corporate cash at
December 31, 2016 (dollars in millions):
(1) Other 2016 activity includes contributions to subsidiaries, reimbursements from subsidiaries for use of the parent's deferred tax
assets, and other expenses and related proceeds under overhead cost sharing arrangements.
The following table provides a reconciliation of consolidated cash and equivalents to corporate cash, a non-
GAAP measure (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,
2016
2015
2014
$
$
1,950
$
2,233
$
(840)
(614)
(35)
(1,264)
(497)
(25)
461
$
447
$
1,783
(1,523)
N/A
(27)
233
(1) Effective October 1, 2016 E*TRADE Clearing was merged into E*TRADE Securities. U.S. broker-dealers' cash at December
31, 2015 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 of cash
held by U.S. broker-dealers at December 31, 2014.
Corporate cash increased $14 million to $461 million during the year ended December 31, 2016. Corporate
cash included dividends of $423 million from E*TRADE Bank, $227 million from E*TRADE Clearing and
$208 million from E*TRADE Securities to the parent company during the year ended December 31, 2016.
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On September 12, 2016, we completed the acquisition of Aperture New Holdings, Inc., the ultimate parent
company of OptionsHouse, an online brokerage, for $725 million. We funded the transaction through the
issuance of fixed-to-floating rate non-cumulative perpetual preferred stock for gross proceeds of $400
million, and the remainder with existing corporate cash. For additional information on the issuance of
preferred stock, see Note 17—Shareholders' Equity.
We used corporate cash to repurchase a total of $452 million, or 19 million shares, of common stock during
the year ended December 31, 2016. Due to the OptionsHouse acquisition, we did not repurchase shares
during the second half of 2016. We will continue to assess the best use of corporate cash and currently
anticipate resuming share repurchases in the second half of 2017.
During 2015, we reduced our total corporate debt to $1.0 billion and, in conjunction with a refinancing,
decreased our annual debt service costs to approximately $50 million. We maintain corporate cash at a
minimum of two times our scheduled annual corporate debt service payments and scheduled maturities
over the next 12 months. As we do not have any scheduled maturities of corporate debt in the coming year,
our current minimum is approximately $100 million. Our nearest maturity of interest-bearing corporate debt
is November 2022.
At December 31, 2016, 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,
2016, 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 onto our balance sheet. Sweep deposits on
our balance sheet as of December 31, 2016 increased $2.3 billion compared to December 31, 2015. We
utilize our sweep deposit platform to efficiently manage our balance sheet size.
We may utilize 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,
2016, E*TRADE Bank had approximately $2.5 billion and $0.6 billion in additional collateralized borrowing
capacity with the FHLB and the Federal Reserve Bank, respectively.
E*TRADE Securities Liquidity
E*TRADE Securities relies on customer payables, securities lending, and internal and external lines of
credit to provide liquidity and to finance margin lending. At December 31, 2016, E*TRADE Securities'
external liquidity lines totaled approximately $1.1 billion and included the following:
• A 364-day, $400 million senior unsecured committed revolving credit facility with a syndicate of banks
that matures in June 2017
• Secured committed lines of credit with two unaffiliated banks, aggregating to $175 million with a
maturity date of June 2017
• Unsecured uncommitted lines of credit with two unaffiliated banks, aggregating to $100 million, of which
$75 million is scheduled to mature in June 2017 and the remaining line has no maturity date
• Secured uncommitted lines of credit with several unaffiliated banks, aggregating to $375 million with no
maturity date
The revolving credit facility contains certain covenants including maintenance covenants related to
E*TRADE Securities' minimum consolidated tangible net worth and regulatory net capital ratio. There were
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no outstanding balances for any of these lines at December 31, 2016. E*TRADE Securities also maintains
lines of credit with the parent company and E*TRADE Bank.
Capital Resources
Capital efficiency is a priority for us. The $858 million of dividends paid to the parent company during the
year ended December 31, 2016 included the following:
•
$423 million from E*TRADE Bank, from earnings and excess capital as a result of regulatory approval
to operate E*TRADE Bank at an 8.0% Tier 1 leverage ratio
•
$435 million from our broker-dealers, from earnings and other sources of excess capital
We plan to use a considerable amount of capital at E*TRADE Bank in 2017 to grow the balance sheet.
Accordingly, we do not expect to distribute dividends from E*TRADE Bank to the parent until 2018. As it
relates to our broker-dealer subsidiaries, on October 1, 2016, we merged E*TRADE Clearing into E*TRADE
Securities. We plan to continue quarterly distributions of excess capital generated by the combined broker-
dealer.
Bank Capital Requirements
The Dodd-Frank Act requires all companies, including savings and loan holding companies, that directly or
indirectly control an insured depository institution to serve as a source of strength for the institution. The
Company and E*TRADE Bank are subject to regulatory capital requirements. Some of these requirements
are still subject to phase-in periods, including certain deductions from and adjustments to regulatory capital
that will be fully implemented at 100% in 2018. For additional information on bank regulatory requirements
and phase-in periods, see Part I. Item 1. Business—Regulation. At December 31, 2016, 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 as follows:
(1) Common Equity Tier 1 capital under Basel III replaced Tier 1 common capital. E*TRADE Financial's Tier 1 common ratio was
17.1% as of December 31, 2014.
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E*TRADE Financial's capital ratios are calculated as follows (dollars in millions):
E*TRADE Financial shareholders’ equity
Deduct:
Preferred stock
E*TRADE Financial Common Equity Tier 1 capital before
regulatory adjustments
Add:
$
$
2016(1)
December 31,
2015(1)
2014(1)
6,272
$
5,799
$
5,375
(394)
—
—
5,878
$
5,799
$
5,375
(Gains) losses in other comprehensive income on available-
for-sale debt securities, net of tax
139
101
255
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(2)
Add:
Preferred stock
Qualifying restricted core capital elements (trust preferred
securities)(3)
Deduct:
Disallowed deferred tax assets
E*TRADE Financial Tier 1 capital
Add:
Allowable allowance for loan losses
Non-qualifying capital instruments subject to phase-out (trust
preferred securities)(3)
E*TRADE Financial total capital
E*TRADE Financial average assets for leverage capital purposes
Deduct:
Goodwill and other intangible assets, net of deferred tax
liabilities
Disallowed deferred tax assets
Other(3)
E*TRADE Financial adjusted average assets for leverage capital
purposes
E*TRADE Financial total risk-weighted assets(4)
(2,029)
(505)
—
3,483
394
—
(267)
(1,419)
(838)
104
3,747
—
—
—
$
3,610
$
3,747
$
124
414
4,148
49,113
(2,029)
(772)
—
46,312
9,422
$
$
$
$
129
310
4,186
44,016
(1,419)
(839)
104
41,862
9,536
$
$
$
$
$
$
$
$
(1,592)
(1,008)
—
3,030
—
433
—
3,463
223
—
3,686
45,445
(1,592)
(1,008)
—
42,845
17,683
E*TRADE Financial Tier 1 leverage ratio (Tier 1 capital / Adjusted
average assets for leverage capital purposes)
E*TRADE Financial Common Equity Tier 1 capital / Total risk-
weighted assets(3)
E*TRADE Financial Tier 1 capital / Total risk-weighted assets
E*TRADE Financial total capital / Total risk-weighted assets
7.8%
37.0%
38.3%
44.0%
9.0%
39.3%
39.3%
43.9%
8.1%
N/A
19.6%
20.8%
(1) Due to the change in regulatory requirements, the 2015 and 2016 ratios were calculated based under Basel III requirements.
The 2014 capital ratios were non-GAAP measures as the 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 these non-GAAP ratios are an important measure of the Company's capital strength and in 2014
managed its capital against ratios then applicable to bank holding companies in preparation for the application of these
requirements.
(2) Common Equity Tier 1 capital under Basel III replaced Tier 1 common capital under Basel I. E*TRADE Financial's Tier 1
common ratio was 17.1% as of December 31, 2014.
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(3) As a result of applying the transition provisions under Basel III in 2015, 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.
In accordance with the transition provisions, the TRUPs were fully phased out of E*TRADE Financial’s Tier 1 capital in 2016.
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.
(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.
At December 31, 2016, 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 as follows:
(1) Common Equity Tier 1 capital under Basel III replaced Tier 1 common capital under Basel I. E*TRADE Bank's Tier 1 common
ratio was 25.7% as of December 31, 2014.
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E*TRADE Bank's capital ratios are calculated as follows (dollars in millions):
E*TRADE Bank shareholder's equity(2)
Add:
2016(1)
December 31,
2015(1)
2014(1)
$
3,153
$
3,181
$
6,102
(Gains) losses in other comprehensive income on available-for-
sale debt securities, net of tax
139
101
255
Deduct:
Goodwill and other intangible assets, net of deferred tax
liabilities
Disallowed deferred tax assets
E*TRADE Bank Common Equity Tier 1 capital / Tier 1 capital(2)(3)
Add:
Allowable allowance for loan losses
E*TRADE Bank total capital(2)
E*TRADE Bank average assets for leverage capital purposes(2)(4)
Deduct:
Goodwill and other intangible assets, net of deferred tax
liabilities
Disallowed deferred tax assets
Other
E*TRADE Bank adjusted average assets for leverage capital
purposes(1)
E*TRADE Bank total risk-weighted assets(2)(5)
(38)
(122)
3,132
105
3,237
35,885
(38)
(122)
—
35,725
8,187
$
$
$
$
(38)
(169)
3,075
110
3,185
31,785
(38)
(169)
—
31,578
8,424
$
$
$
$
(1,467)
(342)
4,548
224
4,772
44,672
(1,467)
(342)
13
42,876
17,717
$
$
$
$
E*TRADE Bank Tier 1 leverage ratio (Tier 1 capital / Adjusted
average assets for leverage capital purposes)(2)(4)
E*TRADE Bank Common Equity Tier 1 capital / Total risk-weighted
assets(2)
E*TRADE Bank Tier 1 capital / Total risk-weighted assets(2)
E*TRADE Bank total capital / Total risk-weighted assets(2)
8.8%
9.7%
38.3%
38.3%
39.5%
36.5%
36.5%
37.8%
10.6%
N/A
25.7%
26.9%
(1) Due to the change in regulatory requirements, the 2015 and 2016 ratios were calculated under Basel III requirements and the
2014 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% as of December 31, 2014.
(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.
For additional information on bank regulatory requirements and phase-in periods, see Part I. Item 1.
Business—Regulation.
Broker-Dealer Capital Requirements
Our broker-dealer subsidiaries are subject to capital requirements determined by their respective regulators.
At December 31, 2016, all of our brokerage subsidiaries met their minimum net capital requirements,
ending the period with excess net capital of $0.9 billion.
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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 these
arrangements, see Note 21—Commitments, Contingencies and Other Regulatory Matters within Item 8.
Financial Statements and Supplementary Data.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at December 31, 2016 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
Total
Trust preferred securities(1)(2)
Corporate debt(3)
Uncertain tax positions
Certificates of deposit(1)(4)
Leases(5)
Purchase obligations(6)
15
50
7
23
27
96
29
104
10
6
53
56
29
101
6
4
39
3
601
1,062
5
—
37
—
Total contractual obligations
$
218
$
258
$
182
$
1,705
$
674
1,317
28
33
156
155
2,363
(1)
Includes annual interest based on the contractual features of each security, using market rates at December 31, 2016. 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)
Includes annual interest payments. Does not assume conversion for the non-interest bearing convertible debentures due 2019.
(4) Does not include sweep deposits, savings deposits, money market or checking deposits as there are no stated maturity dates
and/or scheduled contractual payments.
(5)
(6)
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.
At December 31, 2016, the Company had approximately $18 million of unused lines of credit available to
customers under HELOCs, the majority of which expire in 2017. The Company also had $83 million in
unfunded commitments to fund partnerships, companies and other similar entities, including tax credit
partnerships and community development related entities, which are not required to be consolidated, at
December 31, 2016. Additional information related to commitments and contingent liabilities is detailed in
Note 21—Commitments, Contingencies and Other Regulatory Matters.
RISK MANAGEMENT
As a financial services company, our business is exposed to certain risks. The identification, mitigation and
management of existing and potential risks is critical to effective enterprise risk management. There are
certain risks inherent to our industry (e.g. execution of transactions) and certain risks that will surface
through the conduct of our business operations. We seek to monitor and manage our significant risk
exposures by operating under a set of Board-approved limits and by monitoring certain risk indicators. Our
governance framework requires regular reporting on metrics, significant risks and exposures to senior
management and the Board of Directors. Our risk management framework, as described below, is in
compliance with all applicable requirements.
We have a Board-approved Enterprise Risk Appetite Statement (RAS) that is provided to all employees.
The RAS specifies significant risk exposures and addresses the Company's tolerance of those risks, which
are categorized as follows, with further information provided below:
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• 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 as well as deposit holders' option to
withdraw their deposits. Additionally, spread volatility is a 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 contractual and contingent financial obligations, either on-
or off-balance sheet, in a timely and cost-effective manner 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.
•
Information Technology (IT), Information Security and Cyber Security 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 product, leading to lost
revenues and potentially significant reductions to net income and/or market value.
• 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, applicable guidance, internal
policies and procedures, or ethical standards.
We are also subject to other risks that could impact our business, financial condition, results of operations
or cash flows in future periods. See 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 ensure
that risks are represented appropriately. Certain risks are described in the RAS and related policies which
establish processes and limits. The RAS and these policies are reviewed, challenged and approved by
certain risk committees and the Board of Directors, where applicable, at least annually.
The Risk Oversight Committee, which consists of independent members of the Board of Directors, reviews,
challenges and approves the RAS and certain 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 committees and subcommittees 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.
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• Margin Risk Committee—the Margin Risk Committee (MRC) 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, cyber security and other security risks, legal and regulatory risks,
systems and information technology risks, and employment risks.
• Technology Risk Committee—the Technology Risk Committee (TRC) provides oversight to ensure that
all information security objectives and requirements are met; policies, programs and plans are
implemented; and externally imposed compliance obligations are met for the Company.
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. While the legacy portfolio is running off, performance
is subject to variability in any given quarter and we cannot state with certainty that the declining loan
loss trend will continue.
• We extend margin loans to our brokerage customers which exposes us to the risk of credit losses in the
event a customer's assets are depleted due to adverse market conditions, leaving the account with an
unsecured debit that the customer is not able or willing to cover.
• We engage in financial transactions with counterparties which expose us to counterparty credit losses
or collateral losses in the event a counterparty cannot meet its obligations. These financial transactions
include our invested cash, securities lending, repurchase and reverse repurchase agreements, and
derivatives portfolios, as well as the settlement of trades.
Credit risk is monitored by the Credit Committee and MRC. 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, and they review investment and
lending activities with 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 MRC is responsible for corporate governance and oversight with regard to margin
risk. The MRC identifies, monitors and mitigates where necessary market, operational and credit risks
related to our margin lending activities.
Loss Mitigation on the Loan Portfolio
Our credit risk operations team manages the mitigation of credit risk within 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 $18 million at December 31,
2016. In addition, we have continued a loan modification program initiated in 2015 that targets borrowers of
HELOCs whose original contract terms provided an option to accelerate the date at which the loan begins
amortizing. This program, certain terms of which represented economic concessions such as extended
amortization periods, resulted in $15 million and $14 million, respectively, of modifications classified as
TDRs and $65 million and $44 million, respectively, of modifications not classified as TDRs during the years
ended December 31, 2016 and 2015.
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We continue to have loan modification programs that were established to minimize potential losses in the
mortgage portfolios by targeting borrowers experiencing financial difficulties. During the years ended
December 31, 2016 and 2015, these programs were utilized to modify $13 million and $14 million,
respectively, of one- to four-family loans, and $24 million and $15 million, respectively, of home equity
loans. These modifications were classified as TDRs. We also process minor modifications on certain loans
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, 2016 and 2015, we had $15 million and $20 million, respectively, of mortgage loans
with minor modifications that were not considered TDRs. We currently do not have any active loan
modification programs for consumer loans. Loan modification balances may increase in future periods to
mitigate potential losses as the volume of mortgage loans reaching the end of their interest-only period
increases. The impact to our financial results from such modifications is dependent on a variety of factors,
including any allowance previously established on the modified principal balance.
Currently, our entire loan portfolio is serviced by third parties. To reduce vendor, operational and regulatory
risks, we have assessed our servicing relationships and, where appropriate, consolidated providers or
transferred certain mortgage loans to servicers that specialize in managing troubled assets. At
December 31, 2016, $2.4 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.
During 2016, we completed our review of the mortgage loan portfolio that was aimed at identifying loans to
be repurchased by the originator. Our review 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 were submitted to the original seller for repurchase. During the years
ended December 31, 2016 and 2015, we received one-time payments of $3 million and $2 million,
respectively, from 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 and, ultimately, a benefit to our provision (benefit)
for loan losses. A total of $464 million of loans have been repurchased by or settled with third party
mortgage originators since we began the review process in 2008. As our review is complete, we do not
expect any future repurchases or settlements on the mortgage loan portfolio.
Interest Rate Risk Management
Interest rate risks are monitored and managed by the ALCO, the ERMC and the Risk Oversight Committee,
who review the analysis of earnings sensitivity to changes in market interest rates under various scenarios.
The scenarios assume both parallel and non-parallel shifts in the yield curve. See Item 7A. Quantitative and
Qualitative Disclosures about Market Risk for additional information about our interest rate risks.
Liquidity Risk Management
Liquidity risk is monitored by the ALCO, the ERMC and the 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 the ALCO, the ERMC and the Risk Oversight Committee. See
Item 7A. Quantitative and Qualitative Disclosures about Market Risk for additional information about our
market risks.
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Operational Risk Management
Operational risks are reviewed, challenged and monitored by the ORCC, the ERMC and the 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. We have a Vendor Management
Committee that reports to the ORCC 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, Information Security and Cyber Security Risk Management
IT, information security and cyber security risks are reviewed, challenged and monitored by the Technology
Risk Committee, the ORCC, the ERMC and the Risk Oversight Committee. These risks include potential:
• Cyber-attacks on financial systems that directly or indirectly impact our operations and customers
• Compromised systems from inappropriate use or user access by colleagues or customers
• Vulnerability of customers' computers and mobile devices to the loss of customer information (i.e.,
through identity theft) or other types of fraud that can have monetary consequences
• Reduced availability or loss of customer facing systems due to a cyber-incident, such as a DDoS attack
• 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 the ERMC and the Risk Oversight Committee.
These risks include, but are not limited to:
• Potential loss of customers or adverse changes in customer mix in the brokerage business, which could
lead to decreased trading activity as well as decreased securities lending and margin lending
• Changes in business, economic, or political conditions that negatively impact global financial markets
which could reduce trading volumes and margin lending
• New entrants into the discount brokerage market which could put pressure on revenues and margins
Reputational Risk Management
Reputational risks are reviewed, challenged and monitored by the ERMC and the Risk Oversight
Committee. We recognize that reputational risk can manifest itself in all areas of our business often due to
negative publicity associated 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 (with or without merit)
• Conflicts of interest
• Failure of controls supporting the accuracy of financial reports and disclosures
• Failure of third party vendors to adequately meet their responsibilities
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• Business disruption and system failures
• Security breaches, identity theft or other cyber related events
• Errors in public communication
• Unethical behavior of any employee of the Company or members of the Boards
• Public regulatory findings
Legal, Regulatory and Compliance Risk Management
Legal, regulatory and compliance risks are reviewed, challenged and monitored by the ERMC and the 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 ongoing or potential
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. These risks can expose us
to fines, civil money penalties, payment of damages, and the voiding of contracts. In addition, they can lead
to diminished reputation, reduced franchise value, limited business opportunities, reduced expansion
potential and an inability to enforce contracts.
CONCENTRATIONS OF CREDIT RISK
One- to Four-Family Interest-Only Loans
One- to four-family loans include loans for a five to ten year interest-only period, followed by an amortizing
period ranging from 20 to 25 years. At December 31, 2016, 24% of our one- to four-family portfolio was not
yet amortizing. During the year ended December 31, 2016, borrowers of approximately 14% of the portfolio
made voluntary annual principal payments of at least $2,500 and of this population, nearly half made
principal payments that were $10,000 or greater.
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The following chart outlines when one- to four-family loans convert to amortizing by percentage of the one-
to four-family portfolio at December 31, 2016:
Home Equity Lines of Credit
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, 2016. The home equity loan portfolio consists of
approximately 18% of home equity installment loans and approximately 82% of HELOCs at December 31,
2016. Home equity installment loans are primarily fixed rate and fixed term, fully amortizing loans that do
not offer the option of an interest-only payment. The majority of HELOCs have an interest only draw period
and convert to amortizing loans at the end of the draw period, which typically ranges from five to ten years.
At December 31, 2016, less than 1% of this portfolio will require the borrowers to repay the loan in full at the
end of the draw period in a future period. At December 31, 2016, 15% of the HELOC portfolio had not
converted from the interest-only draw period and had not begun amortizing. During the year ended
December 31, 2016, borrowers of approximately 39% of the portfolio made voluntary annual principal
payments of at least $500 on their HELOCs and slightly under half of those reduced their principal balance
by at least $2,500.
The following chart outlines when HELOCs convert to amortizing by percentage of the HELOC portfolio at
December 31, 2016:
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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 chart and table
show 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,
2016
2015
2014
2013
2012
$ 215
$ 263
$ 294
$ 526
$ 639
136
1
352
36
154
1
418
29
165
1
460
38
164
3
693
53
248
6
893
71
Total nonperforming assets, net
$ 388
$ 447
$ 498
$ 746
$ 964
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
9.4%
8.5%
7.2%
8.1%
8.4%
20.8%
15.3%
9.1%
19.5%
28.8%
126.0% 198.8% 222.5% 198.3% 104.0%
622.0% 667.0% 774.6% 868.3% 617.2%
62.7%
84.6%
87.8%
65.4%
53.8%
Nonperforming assets, net decreased $59 million to $388 million during the year ended December 31,
2016. This decrease reflected continued improvement in economic conditions and legacy loan portfolio run-
off. The decrease was partially offset by our recent offers of loan modification programs to a subset of
borrowers with HELOCs whose original loan terms provided the borrowers the option to accelerate their
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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 $15
million of TDRs during the year ended December 31, 2016. See Risk Management for additional
information.
During the year ended December 31, 2016, we recognized $15 million of interest income on loans that were
nonperforming at December 31, 2016. If our nonperforming loans at December 31, 2016 had been
performing in accordance with their terms, we would have recorded additional interest income of
approximately $14 million for the year ended December 31, 2016. At December 31, 2016 there were no
commitments to lend additional funds to any of these borrowers.
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. The following table presents the allowance for loan losses by loan portfolio at December 31,
2016 and 2015 (dollars in millions):
One- to Four-Family
Home Equity
Consumer
Total
December 31,
December 31,
December 31,
December 31,
2016
2015
2016
2015
2016
2015
2016
2015
General reserve:
Quantitative
component
Qualitative
component
Specific valuation
allowance
Total allowance for
loan losses
Allowance as
a % of loans
receivable(1)
$
34
$
28
$
118
$
245
$
5
$
6
$
157
$
279
4
7
3
9
2
51
10
52
—
—
—
—
6
58
13
61
$
45
$
40
$
171
$
307
$
5
$
6
$
221
$
353
2.3%
1.6%
11.0%
14.5%
1.9%
1.9%
5.8%
7.1%
(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 $1.1 billion during the year ended
December 31, 2016. The allowance for loan losses was $221 million, or 5.8% of total loans receivable, as of
December 31, 2016 compared to $353 million, or 7.1% of total loans receivable, as of December 31, 2015.
Our quantitative allowance methodology continues to include the identification of higher risk mortgage loans
and the period of our forecasted loan losses captured within the general allowance includes the total
probable loss over the remaining life of these loans. The decrease in the allowance for loan losses reflects
updated performance expectations based on the sustained outperformance of a substantial volume of the
higher-risk loans in the HELOC portfolio. For additional information on management's estimate of the
allowance for loan losses, see Summary of Critical Accounting Policies and Estimates in Part II. Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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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):
Year Ended December 31,
2016
2015
2014
2013
2012
Allowance for loan losses, beginning of period
$
353
$
Provision (benefit) for loan losses
Charge-offs:
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) recoveries
(149)
(1)
(17)
(7)
(25)
8
29
5
42
17
Allowance for loan losses, end of period
$
221
$
$
404
(40)
453
36
$
481
143
$
823
355
(2)
(31)
(11)
(44)
—
26
7
33
(44)
(65)
(17)
(126)
11
24
6
41
(41)
(157)
(33)
(231)
14
34
12
60
(190)
(517)
(51)
(758)
9
40
12
61
(11)
353
$
(85)
404
(171)
(697)
$
453
$
481
Net (charge-offs) recoveries
to average loans receivable outstanding
(0.4)%
0.2%
1.2%
1.8 %
5.8%
(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):
2016
2015
2014
2013
2012
Amount
%(1)
Amount
%(1)
Amount
%(1)
Amount
%(1)
Amount
%(1)
December 31,
One- to four-family
$
Home equity
Consumer and other
45
171
5
51.9% $
41.4
6.7
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
Total allowance for
loan losses
$
221
100.0% $
353
100.0% $
404
100.0% $
453
100.0% $
481
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. In order to determine if a loan is collateral dependent, the Company reviews multiple
credit quality attributes and assigns a higher level of risk to loans in which the LTV or CLTV is greater than
110% or 125%, respectively, or if a borrower’s credit score is less than 600. 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 recoveries for the year ended December 31, 2016 increased $28 million compared to the same period
in 2015. This increase reflected continued improvement in economic conditions, an increase in recoveries
of previous charge-offs and legacy loan 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 HELOCs
convert to amortizing loans.
For additional information on the loans portfolio, see Note 8—Loans Receivable, Net.
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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, 2016.
The amortized cost of these securities accounted for over 99% of our total securities portfolio at
December 31, 2016. 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, 2016, all municipal bonds in our securities portfolio were rated investment grade (defined as
a rating equivalent to a Moody’s rating of "Baa3" or higher, or an 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 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.
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, 2016, the allowance for loan
losses was $221 million on $3.8 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. 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
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• The interest rate climate
• The overall availability of housing credit
• General economic conditions
The allowance for loan losses is typically equal to management’s forecast of loan losses in the 18 months
following the balance sheet date as well as the forecasted losses, including economic concessions to
borrowers, over the estimated remaining life of loans modified as TDRs. The quantitative allowance
methodology also includes the identification of higher risk mortgage loans and the period of our forecasted
loan losses captured within the general allowance includes the total probable loss over the remaining life of
these loans. As HELOC conversions have continued and will be substantially complete in 2017, the
estimation uncertainty for this portion of the portfolio has decreased.
Total loans receivable designated as held-for-investment decreased $1.1 billion during the year ended
December 31, 2016. The allowance for loan losses was $221 million, or 5.8% of total loans receivable, as of
December 31, 2016 compared to $353 million, or 7.1% of total loans receivable, as of December 31, 2015.
The decrease in the allowance for loan losses primarily resulted from the following factors:
• Recoveries in excess of prior expectations, including recoveries on previous charge-offs that were not
included in our loss estimates, as well as payoffs on loans converting to amortizing
• Updated performance expectations based on the sustained outperformance of a substantial volume of
the high-risk HELOCs
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 $6 million and $13 million as of December 31, 2016 and
2015, 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.
Valuation and Impairment of Goodwill and Acquired Intangible Assets
Description
Goodwill and other intangible assets are 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, such as
a significant deterioration in the operating environment. Goodwill and other intangible assets, net of
amortization, were $2.4 billion and $320 million, respectively, at December 31, 2016.
Judgments
On September 12, 2016, we completed the acquisition of all of the outstanding equity of Aperture New
Holdings, Inc., the ultimate parent company of OptionsHouse, from Aperture Holdings, L.P. for $725 million.
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We recognized all acquired assets and liabilities, including goodwill of $578 million and finite lived intangible
assets of $169 million, at fair value. The finite lived intangible assets acquired were valued under the
income approach, which required management to make estimates about future earnings and cash flows.
The useful life of the finite lived intangible assets was determined based on management's estimate of the
period over which those intangible assets are expected to provide economic benefit to the Company. For
additional information, see Note 2—Business Acquisition and Note 11—Goodwill and Other Intangibles,
Net.
In conducting the annual goodwill impairment test for 2016, we elected to perform a qualitative analysis that
took into consideration all relevant events and circumstances as well as the results of the most recent
quantitative test performed in 2015. Estimating the fair value of equity in the goodwill impairment evaluation
is a subjective process that involves the use of estimates and judgments in both the income and market
approaches. When using the income 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.
We also evaluate 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.
Our intangible assets have a weighted average remaining useful life ranging from two to 11 years as of
December 31, 2016.
Effects if Actual Results Differ
If our estimates of fair value change due to changes in our business or other factors, we may determine that
an impairment charge is necessary. Estimates of fair value are determined based on a combination of the
income approach and the market approach. If the Company's publicly traded equity were to experience a
significant decrease in market capitalization, goodwill would be tested for impairment. As of December 31,
2015, fair value as a percentage of carrying value of the retail brokerage reporting unit was approximately
350%. Based on the result of the step zero impairment analysis that was performed at November 30, 2016,
management believes the fair value of the Company's equity continues to exceed its carrying value by a
substantial margin.
Intangible assets with finite lives are amortized over their estimated useful lives. If changes in the estimated
useful lives occur, impairment or a change in the remaining life may need to be recognized.
Estimates of Effective Tax Rates, Deferred Taxes and Valuation Allowances
Description
In preparing the consolidated financial statements, we calculate income tax expense (benefit) based on our
interpretation of the tax laws in the various jurisdictions where we conduct business. This requires us to
estimate current tax obligations and the realizability of uncertain tax positions and to assess temporary
differences between the financial statement carrying amounts and the tax 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,
2016, we had net deferred tax assets of $756 million, net of a valuation allowance (on state and foreign
country deferred tax assets) of $35 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
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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. 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, 2016, the Company has no valuation allowance against
federal deferred tax assets.
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. Our expectations regarding future
earnings are objectively verifiable due to various factors. One factor is the consistent profitability of the core
brokerage business, which has generated substantial income for each of the last 13 years, including
through uncertain economic and regulatory environments. Our business is driven by brokerage customer
activity and includes trading, brokerage related cash, margin lending, 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 bank structure
driven by various credit loss mitigation activities and improving economic conditions that benefited our loan
portfolio, and monetizing brokerage relationships by investing stable, low-cost deposits primarily in agency
mortgage-backed securities. We expect to utilize the majority of our existing federal deferred tax assets
within the next two 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, 2016, we had total state deferred tax
assets, net of federal benefit, of approximately $138 million related to our state net operating loss
carryforwards and temporary differences with a valuation allowance of $18 million against such net deferred
tax assets. Effective January 1, 2016, the Company elected to treat its broker-dealers, E*TRADE Securities
and E*TRADE Clearing, as single member LLCs for tax purposes. This election, along with future taxable
income projections at the combined broker-dealer, will result in the utilization of certain state deferred tax
assets against which we had recorded valuation allowances. Accordingly, the Company recognized a tax
benefit of $25 million for the year ended December 31, 2016. At December 31, 2016, the Company had
total foreign deferred tax assets, net of federal benefit, of approximately $18 million. The Company has
provided a valuation allowance of $17 million against such deferred tax assets at December 31, 2016.
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.
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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 Interest
Differential
Page
Average Balance Sheet and Analysis of Net Interest Income
Net 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
Return on Equity and Assets
Short-Term Borrowings
37
71
73
74
72
72
72
63
64
93
121
65
65
37
56
38
75
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Interest Rates and Interest Differential
Increases and decreases in interest income and interest expense result from changes in average balances
(volume) of interest-earning assets and 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
interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of rate
changes is calculated by multiplying the change in average yield/cost by the current year’s volume, with the
remaining change applied to volume (dollars in millions):
2016 Compared to 2015
Increase (Decrease) Due To
2015 Compared to 2014
Increase (Decrease) Due To
Volume
Rate
Total
Volume
Rate
Total
Interest-earning assets:
Cash and equivalents
$
— $
$
— $
1
$
1
Cash required to be segregated under
federal or other regulation
Available-for-sale securities
Held-to-maturity securities
Margin receivables
Loans(1)
Broker-related receivables and other
Subtotal interest-earning assets
Other interest revenue(2)
Total interest-earning assets(3)
$
Interest-bearing liabilities:
Deposits
Customer payables
Other borrowings
Corporate debt
Subtotal interest-bearing liabilities
Other interest expense(4)
Total interest-bearing liabilities
2
14
85
(45)
(53)
1
4
4
1
1
(103)
(4)
(105)
(105)
Change in net interest income(5)
$
109
$
$
4
3
7
(6)
18
14
(3)
37
37
4
5
21
79
(27)
(39)
(2)
41
(24)
17
—
(5)
26
15
(67)
—
(31)
(31)
—
(39)
(8)
(3)
—
—
(49)
(49)
$
(2) $
(1) $
— $
(4) $
(1)
4
(1)
—
—
37
—
(99)
(5)
(105)
(4)
(109)
—
(63)
(43)
(106)
(106)
(3)
(8)
(11)
(26)
(26)
$
126
$
75
$
(23) $
—
(44)
18
12
(67)
—
(80)
16
(64)
(4)
(3)
(71)
(54)
(132)
8
(124)
60
(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 interest income of less than $1 million for the year ended December 31, 2016
and $1 million for both of the years ended December 31, 2015 and 2014.
(3) Represents interest income on securities loaned.
(4) Represents interest expense on securities borrowed.
(5) Beginning in 2016, interest expense related to corporate debt and interest income related to corporate cash are presented
within net interest income. Prior periods have been reclassified to conform with current period presentation.
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Lending Activities
The following table presents the balance and associated percentage of each major loan category (dollars in
millions):
2016
2015
2014
2013
2012
Balance
%
Balance
%
Balance
%
Balance
%
Balance
%
December 31,
One- to four-family
$
1,950
51.9% $
2,488
50.3% $
3,060
48.2% $
4,475
52.5% $
5,442
51.8%
Home equity
1,556
41.4
2,114
42.8
2,834
44.6
3,454
40.4
4,224
40.2
Consumer and other
250
6.7
341
6.9
455
7.2
602
7.1
845
8.0
Total loans receivable
3,756
100.0%
4,943
100.0%
6,349
100.0%
8,531
100.0%
10,511
100.0%
Adjustments:
Unamortized premiums, net
Allowance for loan losses
Total adjustments
16
(221)
(205)
23
(353)
(330)
34
(404)
(370)
45
(453)
(408)
69
(481)
(412)
Loans receivable, net
$
3,551
$
4,613
$
5,979
$
8,123
$ 10,099
The following table shows the contractual maturities of the loan portfolio at December 31, 2016, 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
Total loans receivable
< 1 Year
Due in(1)
1-5 Years
>5 Years
Total
$
$
$
65
72
33
170
$
289
331
150
770
$
$
1,596
$
1,153
67
2,816
$
1,950
1,556
250
3,756
(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, 2016 (dollars in millions):
One- to four-family
Home equity
Consumer
Total loans receivable
Securities
Interest Rate Type
Fixed
Adjustable
Total
$
$
273
260
217
750
$
$
1,612
$
1,224
—
2,836
$
1,885
1,484
217
3,586
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
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• CMOs, 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):
2016
December 31,
2015
2014
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Available-for-sale securities:(1)
Debt securities:
Agency mortgage-backed securities $
12,946
$ 12,634
$
11,888
$ 11,763
$
11,156
$ 11,164
Agency debentures
U.S. Treasuries
Agency debt securities
Municipal bonds
Corporate bonds
Total debt securities
Publicly traded equity securities(2)
Total available-for-sale
securities
Held-to-maturity securities:(1)
791
452
25
32
—
788
407
24
32
—
551
147
55
35
5
557
143
55
35
4
620
—
487
40
5
648
—
499
40
4
14,246
13,885
12,681
12,557
12,308
12,355
7
7
33
32
33
33
$
14,253
$ 13,892
$
12,714
$ 12,589
$
12,341
$ 12,388
Agency mortgage-backed securities $
12,868
$ 12,839
$
10,353
$ 10,444
$
9,793
$
9,971
Agency debentures
Agency debt securities
Other non-agency debt securities
29
29
2,854
2,848
—
—
127
2,523
10
125
2,544
10
164
2,281
10
166
2,329
10
Total held-to-maturity securities $
15,751
$ 15,716
$
13,013
$ 13,123
$
12,248
$ 12,476
(1) Securities with a fair value of approximately $492 million were transferred from available-for-sale securities to held-to-maturity
securities, during the year ended December 31, 2016 pursuant to an evaluation of our investment strategy and an assessment
by management about our intent and ability to hold those particular securities until maturity. See Note 17—Shareholders' Equity
for information on the impact to accumulated other comprehensive income.
(2) Consists of investments in a mutual fund related to the Community Reinvestment Act.
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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, 2016 (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
$
Agency debentures
U.S. Treasuries
Agency debt
securities
Municipal bonds
Total available-
for-sale debt
securities
Held-to-maturity debt
securities:
Agency mortgage-
backed securities
$
Agency debentures
Agency debt
securities
Total held-to-
maturity debt
securities
Borrowings
—
—
—
—
—
—% $
—%
—%
—%
—%
11
—
—
—
—
2.28% $ 4,513
2.39% $ 8,422
2.53% $ 12,946
—%
—%
—%
—%
152
—
25
—
3.36%
—%
2.05%
—%
639
452
—
32
3.25%
2.57%
—%
4.03%
791
452
25
32
$
—
$
11
$ 4,690
$ 9,545
$ 14,246
—
—
—
—% $ 1,152
3.19% $ 3,174
2.79% $ 8,542
2.94% $ 12,868
—%
18
2.13%
11
2.80%
—
—%
29
—%
260
3.47%
1,413
2.54%
1,181
2.81%
2,854
2.74%
$
—
$ 1,430
$ 4,598
$ 9,723
$ 15,751
2.48%
3.27%
2.57%
2.05%
4.03%
2.92%
2.38%
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. We terminated $4.4 billion of legacy wholesale funding obligations 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, 2016:
Securities sold under agreements to
repurchase
Trust preferred securities
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
$
$
$
$
$
$
$
$
—
409
82
—
409
3,672
871
428
—% $
3.55% $
— $
409
$
7
409
0.38%
3.45%
0.14% $
3,829
—% $
3.04% $
884
428
0.44% $
4,920
0.39% $
2.92% $
871
428
$
$
$
$
$
$
2,490
588
422
3,993
860
428
2.76%
5.50%
3.09%
3.07%
6.06%
3.03%
(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.
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 Part I. 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
to help manage exposures to changes in interest rates. Exposure to interest rate risk requires management
to make complex assumptions regarding maturities, market interest rates and customer behavior. Changes
in interest rates, including the following, could impact interest income and expense:
•
Interest-earning assets and interest-bearing liabilities may re-price at different times or by different
amounts, creating a mismatch.
• The yield curve may steepen, flatten or otherwise change shape, which could affect 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, 2016, 91% of our total assets were
interest-earning assets and we had no securities classified as trading.
At December 31, 2016, approximately 60% of total assets were available-for-sale and held-to-maturity
mortgage-backed securities and residential real estate loans. 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.
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When real estate loans are prepaid, unamortized premiums and/or discounts are recognized immediately in
interest income. Depending on the timing of the prepayment, these adjustments to 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, both of
which re-price at management’s discretion. We may utilize wholesale funding sources as needed 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. See Note 9—Derivative Instruments and Hedging Activities for additional
information about our use of derivative contracts.
Scenario Analysis
Scenario analysis is an advanced approach to estimating interest rate risk exposure. The ALCO, ERMC,
and Risk Oversight Committee monitor interest rate risk using the Economic Value of Equity (“EVE”)
approach and the Earnings-at-Risk (“EAR”) approach.
Under the EVE approach, the present value of expected cash flows of all existing interest-earning assets,
interest-bearing liabilities, derivatives and forward commitments are estimated and 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, which
considers prepayment estimates, in the Company’s residential loan and mortgage-backed securities
portfolios.
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 cash and we assume no balance sheet growth.
The sensitivity of EAR and EVE at the consolidated E*TRADE Financial level at December 31, 2016 and
2015 is as follows (dollars in millions):
Economic Value of Equity
Earnings-at-Risk
Instantaneous Parallel
Change in Interest Rates
(basis points) (1)
+200
+100
-50
December 31, 2016
December 31, 2015
December 31, 2016
December 31, 2015
Amount
Percentage
Amount
Percentage
Amount
Percentage
Amount
Percentage
$
$
$
(129)
59
(106)
(2.1)% $
(148)
0.9 % $
58
(2.6)% $
1.0 % $
169
109
13.9 % $
9.0 % $
178
116
(1.7)% $
(107)
(1.9)% $
(73)
(6.0)% $
(64)
15.8 %
10.3 %
(5.7)%
(1) These scenario analyses assume a balance sheet size as of the dates indicated. 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
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assess interest rate risk. 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 notified
of the exception and the planned resolution. At December 31, 2016, 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 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.
KEY 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—Customers that execute 30 or more trades per quarter.
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, the Export-Import Bank and the Federal Home Loan Bank.
ALCO—Asset Liability Committee.
AML—Anti-Money Laundering.
Average commission per trade—Total commissions revenue divided by total number of revenue trades.
Average total shareholders' 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.
Basel III—Global regulatory standards for bank capital adequacy and liquidity as issued by the international
Basel Committee on Banking Supervision.
Basis point—One one-hundredth of a percentage point.
Brokerage account attrition rate—The brokerage account attrition rate is calculated by dividing attriting
brokerage accounts by total brokerage accounts from the previous period end, and is presented on an
annualized basis. Attriting brokerage accounts are derived by subtracting net new brokerage accounts from
gross new brokerage accounts.
Brokerage related cash—Customer sweep deposits held at banking subsidiaries, customer payables and
customer cash held by third parties.
BPO—Broker price opinion.
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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.
CCAR—Comprehensive Capital Analysis and Review (CCAR) process, which requires certain financial
institutions to submit annual capital plans to the Federal Reserve.
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 ratio.
CMOs—Collateralized mortgage obligations.
Common Equity Tier 1 Capital—A measurement of the Company's core equity capital used in the
calculation of capital adequacy ratios. Common Equity Tier 1 Capital equals: total shareholders' equity, less
preferred stock and related surplus, plus/(less) unrealized losses (gains) on certain available-for-sale
securities and cash flow hedges, less goodwill and certain other intangible assets, less certain disallowed
deferred tax assets and subject to certain other applicable adjustments.
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,
sweep and other deposits, customer cash held by third parties, customer payables and vested unexercised
stock plan holdings.
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 which includes one or more underlying securities,
notional amounts, or payment provisions. The contract generally requires no initial net investment and is
settled on a net basis.
Derivative DARTs—Options and futures revenue trades in a period divided by the number of trading days
during that period.
DIF—Deposit Insurance Fund.
Earnings at Risk (EAR)—The sensitivity of GAAP net interest income 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 sensitivity of the value of existing assets and liabilities, including
derivatives and forward commitments, to changes in interest rates. It is a long-term measurement of interest
rate risk and requires assumptions that include prepayment rates on the loan portfolio and mortgage-
backed securities and the repricing of deposits.
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.
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.
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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.
FCM—Futures Commission Merchant.
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).
HELOC—Home equity lines of credit.
HQLA—High-quality liquid assets.
Interest-bearing liabilities—Liabilities such as deposits, customer payables, other borrowings, corporate
debt and certain customer credit balances and securities lending balances on which the Company pays
interest; excludes customer balances held by third parties.
Interest-earning assets—Assets such as available-for-sale securities, held-to-maturity securities, margin
receivables, loans, securities borrowed balances and cash and investments required to be segregated
under regulatory guidelines that earn interest for the Company.
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 amounts.
IT—Information technology.
KRI—Key Risk Indicators.
LCR—Liquidity coverage ratio. The purpose of the LCR is to require banking organizations to hold minimum
amounts of HQLA based on a percentage of their net cash outflows over a 30-day period.
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).
LLC—Limited liability company.
LTV—Loan-to-value ratio.
NASDAQ—National Association of Securities Dealers Automated Quotations.
Net interest income—A measure of interest revenue, net interest income is equal to interest income less
interest expense.
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Net interest margin—A measure of the net yield on our average interest-bearing assets. Net interest margin
is calculated for a given period by dividing the annualized sum of net interest income by average interest-
bearing assets.
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.
PII—Personally identifiable information.
QTL—Qualified thrift lender test.
RAS—Risk Appetite Statement.
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 transferor of an asset the right or obligation to
repurchase 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—Net income divided by average assets.
Return on average total shareholders’ equity—Net income divided by average shareholders’ equity.
Risk-weighted assets—Primarily computed by the assignment of specific risk-weightings 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 cash balances to and from
an FDIC insured account.
Tier 1 capital—Adjusted equity capital used in the calculation of capital adequacy ratios. Tier 1 capital
equals: Common Equity Tier 1 capital plus qualifying preferred stock and related surplus, subject to certain
other applicable adjustments.
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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.
TRUPs—Trust preferred securities.
VIE—Variable interest entity.
Wholesale borrowings—Borrowings that consist of repurchase agreements and FHLB advances.
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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 consolidated financial statements for external purposes in
accordance with generally accepted accounting principles (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
• 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 consolidated 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, 2016 to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated 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, 2016, 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, 2016, 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, 2016 of the
Company and our report dated February 22, 2017 expressed an unqualified opinion on those consolidated
financial statements.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 22, 2017
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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, 2016 and 2015, and the related consolidated statements of
income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2016. 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, 2016 and 2015, and the
results of their operations and their cash flows for each of the three years in the period ended December 31,
2016, 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, 2016, 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 22, 2017 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
McLean, Virginia
February 22, 2017
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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except share data and per share amounts)
Revenue:
Interest income
Interest expense
Net interest income
Commissions
Fees and service charges
Principal transactions
Gains (losses) on securities and other, net
Other revenue
Total non-interest income
Total net revenue
Provision (benefit) for loan losses
Non-interest expense:
Compensation and benefits
Advertising and market development
Clearing and servicing
Professional services
Occupancy and equipment
Communications
Depreciation and amortization
FDIC insurance premiums
Amortization of other intangibles
Restructuring and acquisition-related activities
Losses on early extinguishment of debt, net
Other non-interest expenses
Total non-interest 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,
2016
2015
2014
$
1,233
$
1,215
$
(85)
1,148
442
268
—
42
41
793
1,941
(149)
501
131
105
97
98
87
79
25
23
35
—
71
1,252
838
286
552
1.99
1.98
$
$
$
$
$
$
(194)
1,021
424
210
—
(324)
39
349
1,370
(40)
466
124
95
103
88
90
81
41
20
17
112
82
1,319
91
(177)
268
0.92
0.91
$
$
$
1,279
(318)
961
456
200
10
39
38
743
1,704
36
412
120
94
112
79
71
78
79
22
8
71
70
1,216
452
159
293
1.02
1.00
277,789
279,048
290,762
295,011
288,705
294,103
See accompanying notes to the consolidated financial statements
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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In millions)
Net income
Other comprehensive income (loss), net of tax
Available-for-sale securities:
Unrealized gains (losses), net
Reclassification into earnings, net
Net change from available-for-sale securities
Cash flow hedging instruments:
Unrealized losses, net
Reclassification into earnings, net
Net change from cash flow hedging instruments
Foreign currency translation losses, net
Other comprehensive income (loss)
Comprehensive income
Year Ended December 31,
2016
2015
2014
$
552
$
268
$
293
(5)
(33)
(38)
—
—
—
—
(38)
514
$
$
(84)
(24)
(108)
(10)
271
261
(3)
150
418
$
193
(26)
167
(39)
76
37
—
204
497
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,
2016
2015
Cash and equivalents
$
1,950
$
ASSETS
Cash required to be segregated under federal or other regulations
Available-for-sale securities
Held-to-maturity securities (fair value of $15,716 and $13,123 at December 31, 2016
and December 31, 2015, respectively)
Margin receivables
Loans receivable, net (net of allowance for loan losses of $221 and $353 at
December 31, 2016 and December 31, 2015, respectively)
Receivables from brokers, dealers and clearing organizations
Property and equipment, net
Goodwill
Other intangibles, net
Deferred tax assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits
Customer payables
Payables to brokers, dealers and clearing organizations
Other borrowings
Corporate debt
Other liabilities
Total liabilities
Commitments and contingencies (see Note 21)
Shareholders’ equity:
Preferred stock, $0.01 par value, $1,000 liquidation preference, shares authorized:
1,000,000 at December 31, 2016 and December 31, 2015; shares issued and
outstanding: 400,000 at December 31, 2016 and none at December 31, 2015
Common stock, $0.01 par value, shares authorized: 400,000,000 at December 31,
2016 and December 31, 2015; shares issued and outstanding: 273,963,415 and
291,335,241 at December 31, 2016 and December 31, 2015, respectively
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
1,460
13,892
15,751
6,731
3,551
1,056
239
2,370
320
756
923
2,233
1,057
12,589
13,013
7,398
4,613
520
236
1,792
174
1,033
769
$
$
48,999
$
45,427
31,682
$
29,445
8,159
983
409
994
500
6,544
1,576
491
997
575
42,727
39,628
394
3
6,921
(909)
(137)
6,272
$
48,999
$
—
3
7,356
(1,461)
(99)
5,799
45,427
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)
Preferred
Stock
Common Stock
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance, December 31, 2013
$
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
Balance at December 31, 2014
$
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
Balance at December 31, 2015
$
Net income
Other comprehensive loss
Conversion of convertible debentures
Exercise of stock options and related tax
effects
Issuance of preferred stock
Repurchases of common stock
Issuance of restricted stock, net of
forfeitures and retirements to pay
taxes
Share-based compensation
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
394
—
—
—
287
$
—
—
1
—
1
—
289
$
—
—
3
—
(2)
1
—
291
$
—
—
1
—
—
(19)
1
—
Balance at December 31, 2016
$
394
274
$
3
—
—
—
—
—
—
3
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
3
$
7,328
$
(2,022) $
(453) $
—
—
5
6
(13)
24
293
—
—
—
—
—
—
204
—
—
—
—
4,856
293
204
5
6
(13)
24
$
7,350
$
(1,729) $
(249) $
5,375
—
—
30
2
(50)
(10)
34
268
—
—
—
—
—
—
—
150
—
—
—
—
—
268
150
30
2
(50)
(10)
34
$
7,356
$
(1,461) $
(99) $
5,799
—
—
5
4
—
(452)
(22)
30
552
—
—
—
—
—
—
—
—
(38)
—
—
—
—
—
—
552
(38)
5
4
394
(452)
(22)
30
$
6,921
$
(909) $
(137) $
6,272
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)
(Gains) losses on securities and other, net
Losses on early extinguishment of debt, net
Share-based compensation
Deferred tax expense (benefit)
Other
Net effect of changes in assets and liabilities:
(Increase) decrease in cash required to be segregated under
federal or other regulations
(Increase) decrease in receivables from brokers, dealers and
clearing organizations
Decrease (increase) in margin receivables
Decrease (increase) in other assets
(Decrease) increase 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 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
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
Acquisition of OptionsHouse, net of cash acquired
Net cash flow from derivative contracts
Other
Net cash (used in) provided by investing activities
Year Ended December 31,
2016
2015
2014
$
552
$
268
$
293
(149)
239
(42)
—
30
275
(5)
(403)
(528)
667
2
(593)
1,615
—
(35)
1,625
(6,705)
3,194
1,540
(4,389)
2,068
—
1,176
(75)
—
20
(723)
(109)
(1)
(4,004)
(40)
325
324
37
34
(176)
1
(502)
364
277
(22)
(123)
89
—
(24)
832
(6,150)
3,905
1,667
(2,614)
1,788
40
1,337
(70)
—
28
—
(2)
73
2
36
331
(39)
6
24
155
1
511
(24)
(1,322)
(132)
593
145
11
112
701
(1,564)
1,855
1,468
(3,209)
1,144
813
1,273
(87)
67
37
—
(15)
(69)
1,713
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E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS—(Continued)
(In millions)
Cash flows from financing activities:
Increase (decrease) in deposits
Year Ended December 31,
2016
2015
2014
$
2,237
$
4,555
$
(1,081)
Net decrease in securities sold under agreements to repurchase
(82)
Advances from FHLB
Payments on advances from FHLB
Proceeds from issuance of senior notes
Payments on senior notes
Repurchases of trust preferred securities
Proceeds from issuance of preferred stock
Repurchases of common stock
Net cash flow from derivatives hedging liabilities
Other
Net cash provided by (used in) financing activities
(Decrease) increase 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
Transfer of available-for-sale securities to held-to-maturity
securities
$
$
$
$
—
—
—
—
—
400
(452)
—
(7)
2,096
(283)
2,233
(3,590)
960
(1,880)
460
(800)
(15)
—
(50)
(16)
(8)
(384)
450
1,783
1,950
$
2,233
$
77
6
$
$
— $
34
$
— $
5
492
$
$
212
8
39
27
$
$
$
$
— $
30
$
— $
(871)
730
(730)
540
(940)
—
—
—
(170)
53
(2,469)
(55)
1,838
1,783
318
—
795
53
16
5
—
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. In addition it clears and settles securities transactions for its
customers.
• Aperture, LLC (dba OptionsHouse) is a registered broker-dealer focused on active traders through its
derivatives platform.
• E*TRADE Bank and its subsidiary E*TRADE Savings Bank are federally chartered savings banks which
provide our customers with FDIC insurance on qualifying amounts of customer deposits and other
banking and cash management capabilities. We utilize our bank structure to effectively monetize the
value of brokerage deposits.
• E*TRADE Financial Corporate Services is a provider of software and services for managing equity
compensation plans to our corporate clients.
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. Investments in marketable equity
securities where the Company does not have the ability to exercise significant influence over the entities are
accounted for as available-for-sale equity securities. The Company also evaluates its initial and continuing
involvement with certain entities to determine if the Company is required to consolidate the entities under
the variable interest entity (VIE) model. This evaluation is based on a qualitative assessment of whether the
Company is the primary beneficiary of the VIE, which requires the Company to possess both: 1) the power
to direct the activities that most significantly impact the economic performance of the VIE; and 2) the
obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to
the VIE. The consolidated financial statements do not include any consolidated VIEs for all periods
presented.
The Company's consolidated financial statements are prepared in accordance with GAAP. Intercompany
accounts and transactions are eliminated in consolidation. These consolidated financial statements reflect
all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position,
results of operations and cash flows for the periods presented.
Beginning January 1, 2016, the Company changed its segment reporting structure to align with the manner
in which the Chief Operating Decision Maker reviews business performance and makes resource allocation
decisions. As the Chief Operating Decision Maker's business performance assessments and resource
allocation decisions are based on consolidated operating margin, the Company no longer has separate
operating segments and, accordingly, no longer presents disaggregated segment financial results. The
Company also updated the presentation of its consolidated statement of income to reflect how business
performance is measured and prior periods have been reclassified to conform to the current period
presentation as follows:
•
•
Interest expense related to corporate debt and interest income related to corporate cash reclassified
from other income (expense) to net interest income
Losses on early extinguishment of debt, net reclassified from other income (expense) to non-interest
expense
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• Other income (expense) reclassified from other income (expense) to gains (losses) on securities and
other, net
Use of Estimates—Preparing the Company's consolidated financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related notes for the periods presented. Actual results could differ
from management’s estimates. Certain significant accounting policies are critical because they are based
on estimates and assumptions that require complex and subjective judgments by management. Changes in
these estimates or assumptions could materially impact the Company’s financial condition and results of
operations. Material estimates in which management believes changes could reasonably occur include:
allowance for loan losses; valuation and impairment of goodwill and acquired intangible assets; and
estimates of effective tax rates, deferred taxes and valuation allowance.
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 $1.1 billion and $1.6
billion at December 31, 2016 and 2015, 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 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 interest income. Amortization or accretion of
premiums and discounts on available-for-sale debt securities is also recognized in 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, with the exception
of other-than-temporary impairment (OTTI), are included in the gains (losses) on securities and other, net
line item. Available-for-sale securities that have an unrealized loss (impaired securities) are evaluated for
OTTI at each balance sheet date.
Held-to-Maturity Securities—Held-to-maturity securities consist of debt securities, primarily residential
mortgage-backed securities 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 interest income. Amortization or accretion of premiums and
discounts is also recognized in 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 securities) are evaluated for OTTI at each balance sheet date.
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.
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Margin Receivables—Margin receivables represent credit extended to customers to finance their purchases
of securities by borrowing against securities the customers own. Securities owned by customers are held as
collateral for amounts due on the margin receivables, the value of which is not reflected in the consolidated
balance sheet. The Company is permitted to sell or re-pledge these securities held as collateral and to use
the securities to enter into securities lending transactions, to collateralize borrowings or for delivery to
counterparties to cover customer short positions.
The fair value of securities that the Company received as collateral in connection with margin receivables
and securities borrowing activities, where the Company is permitted to sell or re-pledge the securities, was
approximately $9.8 billion and $10.1 billion at December 31, 2016 and 2015, respectively. Of this amount,
$2.0 billion and $2.5 billion had been pledged or sold in connection with securities loans and deposits with
clearing organizations at December 31, 2016 and 2015, 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 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 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
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.
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
interest income until it is doubtful that full payment will be collected, at which point payments are applied to
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principal. The recognition of deferred fees or costs on originated loans and premiums or discounts on
purchased loans in 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. The
allowance for loan losses is typically equal to management’s forecast of loan losses in the 18 months
following the balance sheet date as well as the forecasted losses, including economic concessions to
borrowers, over the estimated remaining life of loans modified as TDRs. The quantitative allowance
methodology also includes the identification of higher risk mortgage loans and the period of our forecasted
loan losses captured within the general allowance includes the total probable loss over the remaining life of
these loans. As of December 31, 2016, the allowance for loan losses was $221 million on $3.8 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. 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
• General economic conditions
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 $6 million and $13 million as of
December 31, 2016 and 2015, 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
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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 to determine whether it is more likely than not that
the fair value of its equity is less than the carrying value. If it is more likely than not that the fair value
exceeds the carrying value, 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 11—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.
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 gains (losses) on securities and other, net line item in the consolidated statement of income. The
Company’s other investments include those accounted for using the proportional amortization method,
whereby 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 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 gains (losses) on securities and other, net
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, 2016 and 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, are 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
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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 (1) 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 (2) 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 16—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 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 —The Company’s comprehensive income is composed of net income, the
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 (losses), net of reclassification adjustments and related tax.
Derivative Instruments and Hedging Activities—The Company enters into derivative transactions primarily
to protect against interest rate risk on the value of certain assets, liabilities and future cash flows. Each
derivative 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.
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, net 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, net line item in the consolidated statement of
income. For additional information on derivative instruments and hedging activities, see Note 9—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 5—Fair Value Disclosures.
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Interest Income—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. Interest income also includes the impact of the
Company’s derivative transactions related to interest-earning assets.
Interest Expense—Interest expense is recognized as incurred through holding interest-bearing liabilities,
such as deposits, customer payables, securities sold under agreements to repurchase, FHLB advances,
corporate debt and from securities lending activities. 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 cash 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 acquisition-related activities line item on the
consolidated statement of income.
Gains (Losses) on Securities and Other, Net—Gains (losses) on securities and other, net 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 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.
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
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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.
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.
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 typically
issues new shares upon exercise of stock options and vesting of other equity awards and intends to
continue doing so.
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, 2016, there were 0.1 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, 2016, there were 3.1 million restricted stock awards and units outstanding and $43
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 1.7 years. As of December 31, 2016, there
were also 0.1 million performance share units outstanding. The total fair value of restricted stock awards,
restricted stock units and performance share units vested was $48 million, $28 million and $34 million for
the years ended December 31, 2016, 2015 and 2014, respectively.
The Company recognized $30 million, $34 million and $24 million in expense for its options, restricted stock
awards, restricted stock units and performance share units for the years ended December 31, 2016, 2015
and 2014, 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,
2016, 10 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 generally included in the
compensation and benefits line item.
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Advertising and Market Development—Advertising and market development includes production and
placement of advertisements as well as client promotion costs. Advertising production costs are expensed
when the initial advertisement is run.
Earnings Per Share—Basic earnings per share is computed by dividing net income available to common
shareholders 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
earnings 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
Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern
In August 2014, the FASB amended the guidance related to an entity’s evaluations and disclosures of going
concern uncertainties. The new guidance requires management to perform interim and annual assessments
of the entity’s ability to continue as a going concern within one year of the date the financial statements are
issued, and to provide certain disclosures if conditions or events raise substantial doubt about the entity’s
ability to continue as a going concern. The Company adopted the amended guidance for annual and interim
periods beginning on January 1, 2016. The adoption of the amended guidance did not impact the
Company’s financial condition, results of operations or cash flows.
Consolidation
In February 2015, the FASB amended the guidance on consolidation of certain legal entities. The amended
guidance modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting
interest entities, eliminates the presumption that a general partner should consolidate a limited partnership,
and clarifies how to determine whether a group of equity holders has power over an entity. The Company
adopted the amended guidance for annual and interim periods beginning on January 1, 2016 on a modified
retrospective basis. The adoption of the amended guidance did not impact the Company’s financial
condition, results of operations or cash flows.
Accounting for Customer Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB amended the accounting guidance on customer fees paid in a cloud computing
arrangement. The amended guidance requires that internal-use software accessed by a customer in cloud
computing arrangements be accounted for as software licenses if specific criteria are met; otherwise they
should be accounted for as service contracts. The Company adopted the amended guidance for annual and
interim periods beginning on January 1, 2016 on a prospective basis. The adoption of the amended
guidance did not impact the Company’s financial condition, results of operations or cash flows.
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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 Company's accounting for net interest income is not expected to be
impacted by the new standard. The FASB issued supplemental amendments to the new standard to clarify
certain accounting guidance and provide narrow scope improvements and practical expedients during 2016.
The amended guidance will be effective for annual and interim periods beginning on January 1, 2018 for the
Company and may be applied on either a full retrospective or modified retrospective basis. The Company is
currently evaluating the impact of the new accounting guidance and expects to complete this evaluation in
2017. The adoption of the amended revenue recognition guidance is not expected to have a material impact
on the Company’s financial condition, results of operations or cash flows as the satisfaction of performance
obligations under the new guidance is expected to be materially consistent with the Company's existing
revenue recognition policies. The Company is also evaluating the impact of the amended accounting
guidance on the accounting for incremental costs of obtaining contracts and on additional disclosure
requirements.
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. The Company is currently evaluating the impact of the new
accounting guidance; however, the adoption is not expected to have a material impact on the Company’s
financial condition, results of operations or cash flows as debt securities represent the majority of the
Company's investment portfolio.
Accounting for Leases
In February 2016, the FASB amended the guidance on accounting for leases. The new standard requires
lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all
qualifying leases with terms of more than twelve months. The recognition, measurement and presentation
of expenses and cash flows arising from a lease by a lessee remains substantially unchanged and depends
on classification as a finance or operating lease. The new standard also requires quantitative and qualitative
disclosures that provide information about the amounts related to leasing arrangements recorded in the
financial statements. The new guidance will be effective for interim and annual periods beginning on
January 1, 2019 for the Company and is required to be applied on a modified retrospective basis to the
earliest period presented, which includes practical expedient options in certain circumstances. The
Company is currently evaluating the impact of the new accounting guidance on the Company's financial
condition, results of operations and cash flows; however, the Company's business model of providing
services through digital platforms and via phone and online channels in addition to 30 regional branches
may limit the impact of the amended lease accounting guidance to the Company's financial condition.
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Accounting for Employee Share-Based Payments
In March 2016, the FASB amended the accounting guidance on employee shared-based payments.
Relevant changes in the amended guidance include the requirement to recognize all excess tax benefits
and deficiencies upon exercise or vesting as income tax expense or benefit in the consolidated statement of
income; to treat excess tax benefits and deficiencies as discrete items in the reporting period they occur; to
not delay recognition of excess tax benefits until the tax benefit is realized through a reduction in current
taxes payable; and to make an accounting policy election to either estimate forfeitures or account for
forfeiture as they occur. The Company adopted the amended accounting guidance as of January 1, 2017
and recognized an insignificant cumulative-effect adjustment to equity as of the beginning of the period.
Forfeitures will continue to be estimated consistent with the Company's existing accounting policies. The
impact to the Company's financial condition, results of operations and cash flows will vary based on, among
other factors, the market price of the Company's common stock.
Accounting for Credit Losses
In June 2016, the FASB amended the accounting guidance on accounting for credit losses. The amended
guidance requires measurement of all expected credit losses for financial instruments and other
commitments to extend credit held at the reporting date. For financial assets measured at amortized cost,
factors such as historical experience, current conditions, and reasonable and supportable forecasts will be
used to estimate expected credit losses. The amended guidance will also change the manner in which
credit losses are recognized on debt securities classified as available-for-sale. The new guidance will be
effective for interim and annual periods beginning January 1, 2020 for the Company. Early adoption is
permitted. The Company is currently evaluating the impact of the new accounting guidance on the
Company's financial condition, results of operations and cash flows; however, given the recent performance
of the Company's run-off legacy loan portfolio and the credit profile of the current investment securities
portfolio, the Company does not expect this amended accounting guidance to have as significant of an
impact as it could have if the Company were originating or purchasing loans.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB amended the guidance on the presentation and classification of certain cash
receipts and cash payments in the statement of cash flows to eliminate current diversity in practice. The
new guidance will be effective for interim and annual periods beginning January 1, 2018 for the Company
and must be applied using a retrospective transition method to each period presented. Early adoption is
permitted. The Company does not expect the amended accounting guidance to have a significant impact on
its consolidated statement of cash flows.
Classification of Restricted Cash
In November 2016, the FASB amended the guidance on the presentation and classification of changes in
restricted cash in the statement of cash flows to eliminate current diversity in practice. The amended
guidance requires the statement of cash flows to explain the change during the period in the total cash,
cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. The
guidance will be effective for interim and annual periods beginning January 1, 2018 for the Company and
must be applied using a retrospective transition method to each period presented. Early adoption is
permitted. The Company is currently evaluating the impact of the new presentation and classification
guidance.
Clarifying the Definition of a Business
In January 2017, the FASB issued guidance to clarify the definition of a business in order to assist
companies in the evaluation of whether transactions should be accounted for as acquisitions or disposals of
assets or businesses. The amended guidance also removes the existing evaluation of a market participant's
ability to replace missing elements and narrows the definition of output to achieve consistency with other
topics. The guidance will be effective for interim and annual periods beginning January 1, 2018 for the
Company and must be applied prospectively. Early adoption is permitted.
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Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued guidance to simplify the test for goodwill impairment by eliminating Step
2 from the goodwill impairment test. The amended guidance requires the Company to perform its annual
goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An
impairment charge should be recognized at the amount by which the carrying amount exceeds the fair
value of the reporting unit; however, the loss recognized should not exceed the total amount of goodwill
allocated to that reporting unit. Income tax effects resulting from any tax deductible goodwill should be
considered when measuring the goodwill impairment loss, if applicable. The Company will still have the
option to perform a qualitative assessment to conclude whether it is more likely than not that the carrying
amount of the Company exceeds its fair value. The guidance will be effective for interim and annual periods
beginning January 1, 2020 for the Company and must be applied prospectively. Early adoption is permitted.
NOTE 2—BUSINESS ACQUISITION
OptionsHouse Acquisition
On September 12, 2016, the Company completed its acquisition of all of the outstanding equity of Aperture
New Holdings, Inc., the ultimate parent company of OptionsHouse, from Aperture Holdings, L.P. for $725
million. OptionsHouse is an online brokerage firm focused on serving active traders through its derivatives
platform. We expect that the acquisition will enhance E*TRADE's derivatives capabilities and offerings to
current customers while providing the benefit of an expanded breadth of offerings, including 24 hour
customer service, long-term investing tools, and mobile experience, to current OptionsHouse customers.
The results of OptionsHouse's operations have been included in the Company's consolidated statement of
income for the year ended December 31, 2016 from the date of the acquisition. OptionsHouse's net
revenue from September 12, 2016 through December 31, 2016 was $31 million. Supplemental pro forma
financial information related to the acquisition is not included because the impact on the Company's
consolidated statement of income is not material.
The following table summarizes the allocation of the purchase price to the net assets of OptionsHouse as of
September 12, 2016 (dollars in millions):
Purchase price
Purchased cash adjustment
Working capital adjustment
Total cash consideration paid
Fair value of net assets acquired
Goodwill
September 12, 2016
725
26
(2)
749
171
578
$
$
$
$
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The following table summarizes the fair values of the assets acquired and liabilities assumed as of the
acquisition date (dollars in millions):
September 12, 2016
Assets
Cash and equivalents
Identifiable intangible assets
Property and equipment
Other assets
Total assets acquired
Liabilities
Deferred tax liabilities, net
Accrued expenses and other liabilities
Total liabilities assumed
Net assets acquired
$
$
$
$
$
26
169
6
12
213
31
11
42
171
The goodwill of $578 million primarily includes the synergies expected to result from combining operations
with OptionsHouse and coupling its derivatives platform with the Company's existing product offerings.
Approximately $122 million of this goodwill is deductible for tax purposes.
The Company recorded intangible assets of $169 million, which are subject to amortization over their
estimated useful lives. Approximately $63 million of the intangible assets is deductible for tax purposes. The
fair value of the intangible assets was determined under the income approach. The following table
summarizes the estimated fair value and estimated useful lives of the intangible assets (dollars in millions):
Customer relationships
Technology
Trade name
Total intangible assets
Estimated Fair
Value
Estimated Useful
Life (In Years)
$
$
118
48
3
169
14
7
2
NOTE 3—RESTRUCTURING AND ACQUISITION-RELATED ACTIVITIES
The following table shows the components of restructuring and acquisition-related activities expense
(dollars in millions):
Restructuring activities
Acquisition-related costs
Total restructuring and acquisition-related activities
Year Ended December 31,
2016
2015
2014
$
$
28
$
7
35
$
17
—
17
$
$
8
—
8
The Company incurred $7 million of acquisition-related costs in connection with its purchase of
OptionsHouse, which was completed on September 12, 2016. Restructuring activities during the year
ended December 31, 2016 includes approximately $28 million of costs, primarily related to employee
severance from the realignment of the Company's core brokerage business and organizational structure.
The liability for restructuring activities at December 31, 2016 was $3 million.
Restructuring activities during the year ended December 31, 2015 includes costs related to department and
business reorganizations, such as the shutdown of certain of the Company's international operations, and
approximately $6 million of executive severance for a position that was eliminated during the year.
Restructuring activities during the year ended December 31, 2014 included a $4 million gain on the sale of
the market making business, which was completed in February 2014.
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NOTE 4—INTEREST INCOME AND INTEREST EXPENSE
The following table shows the components of interest income and interest expense (dollars in millions):
Year Ended December 31,
2016
2015
2014
Interest income:
Cash and equivalents
$
Cash required to be segregated under federal or other
regulation
Available-for-sale securities
Held-to-maturity securities
Margin receivables
Loans
Broker-related receivables and other
Subtotal interest income
Other interest revenue(1)
Total interest income(2)
Interest expense:
Deposits
Customer payables
Other borrowings(3)
Corporate debt
Subtotal interest expense
Other interest expense(4)
Total interest expense(5)
Net interest income(6)
$
7
6
266
425
249
191
1
1,145
88
1,233
(3)
(5)
(18)
(54)
(80)
(5)
(85)
$
3
1
244
346
276
230
3
1,103
112
1,215
(4)
(5)
(117)
(59)
(185)
(9)
(194)
2
1
288
328
264
297
3
1,183
96
1,279
(8)
(8)
(188)
(113)
(317)
(1)
(318)
961
$
1,148
$
1,021
$
(1) Represents interest income on securities loaned.
(2)
Interest income reflects $(35) million, $(42) million, and $(31) million recognized on hedges that qualify for hedge accounting for
the years ended December 31, 2016, 2015, and 2014, respectively.
(3)
In September 2015, the Company terminated $4.4 billion of legacy wholesale funding obligations.
(4) Represents interest expense on securities borrowed.
(5)
Interest expense reflects none, $(74) million, and $(132) million recognized on hedges that qualify for hedge accounting for the
years ended December 31, 2016, 2015, and 2014, respectively.
(6) Beginning in 2016, interest expense related to corporate debt and interest income related to corporate cash are presented
within net interest income. Prior periods have been reclassified to conform with current period presentation.
NOTE 5—FAIR VALUE DISCLOSURES
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. In determining fair value, the
Company may use various valuation approaches, including market, income and/or cost approaches. The
fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from
the perspective of a market participant. Accordingly, even when market assumptions are not readily
available, the Company’s own assumptions reflect those that market participants would use in pricing the
asset or liability at the measurement date. The fair value measurement accounting guidance describes the
following three levels used to classify fair value measurements:
•
•
Level 1—unadjusted quoted prices in active markets for identical assets or liabilities that are accessible
by the Company
Level 2—quoted prices for similar assets and liabilities in an active market, 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
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The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value
may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy
is based on the lowest level of input that is significant to the fair value measurement. The Company’s
assessment of the significance of a particular input to a fair value measurement requires judgment and
consideration of factors specific to the asset or liability.
Recurring Fair Value Measurement Techniques
Mortgage-backed Securities
The Company’s mortgage-backed securities portfolio is comprised of agency mortgage-backed securities
which are guaranteed by U.S. government sponsored enterprises and federal agencies. The weighted
average coupon rate for the available-for-sale mortgage-backed securities at December 31, 2016 was
2.84%.
The fair value of agency mortgage-backed securities was determined using a market approach with quoted
market prices, recent transactions and spread data for identical or similar instruments. Agency mortgage-
backed securities were categorized in Level 2 of the fair value hierarchy.
Other Debt Securities
The Company's fair value level classification of U.S. Treasuries is based on the original maturity dates of
the securities and whether the securities are the most recent issuances of a given maturity. U.S. Treasuries
with original maturities less than one year are classified as Level 1. U.S. Treasuries with original maturities
longer than one year are classified as Level 1 if they represent the most recent issuance of a given maturity;
otherwise, these securities are classified as Level 2.
The fair value measurements of agency debentures and agency debt securities were determined using
market and income approaches along with the Company’s own trading activities for identical or similar
instruments and were categorized in Level 2 of the fair value hierarchy.
The valuation of corporate bonds is impacted by the credit worthiness of the corporate issuer. The
Company did not have any corporate bonds at December 31, 2016. All of the Company’s municipal bonds
were rated investment grade at December 31, 2016. These securities were valued using a market approach
with pricing service valuations corroborated by recent market transactions for identical or similar bonds.
Municipal bonds and corporate bonds were categorized in Level 2 of the fair value hierarchy.
Publicly Traded Equity Securities
The fair value measurements of the Company's publicly traded equity securities were classified as Level 1
of the fair value hierarchy as they were based on quoted market prices in active markets.
Derivative Instruments
Interest rate swap and option contracts were valued with an income approach using pricing models that are
commonly used by the financial services industry. The market observable inputs used in the pricing models
include the swap curve, the volatility surface, and prime or overnight indexed swap basis from a financial
data provider. The Company does not consider these models to involve significant judgment on the part of
management, and the Company corroborated the fair value measurements with counterparty valuations.
The Company’s derivative instruments were categorized in Level 2 of the fair value hierarchy. The
consideration of credit risk, the Company’s or the counterparty’s, did not result in an adjustment to the
valuation of its derivative instruments in the periods presented.
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Nonrecurring Fair Value Measurement Techniques
Certain other assets are recorded at fair value on a nonrecurring basis: 1) one- to four-family and home
equity loans in which the amount of the loan balance in excess of the estimated current value of the
underlying property less estimated selling costs has been charged-off; and 2) real estate owned that is
carried at the lower of the property’s carrying value or fair value less estimated selling costs.
The Company evaluates and reviews assets that have been subject to fair value measurement
requirements on a quarterly basis in accordance with policies and procedures that were designed to be in
compliance with guidance from the Company’s regulators. These policies and procedures govern the
frequency of the review, the use of acceptable valuation methods, and the consideration of estimated selling
costs.
Loans Receivable
Loans that have been delinquent for 180 days or that are in bankruptcy and certain TDR loan modifications
are charged-off based on the estimated current value of the underlying property less estimated selling
costs. Property valuations for these one- to four-family and home equity loans are based on the most recent
"as is" property valuation data available, which may include appraisals, broker price opinions (BPOs),
automated valuation models or updated values using home price indices. Subsequent to the recording of an
initial fair value measurement, these loans continue to be measured at fair value on a nonrecurring basis,
utilizing the estimated value of the underlying property less estimated selling costs. These property
valuations are updated on a monthly, quarterly or semi-annual basis depending on the type of valuation
initially used. If the value of the underlying property has declined, an additional charge-off is recorded. If the
value of the underlying property has increased, previously charged-off amounts are not reversed. If the
valuation data obtained is significantly different from the valuation previously received, the Company
reviews additional property valuation data to corroborate or update the valuation.
BPOs are a type of valuation input used to determine the estimated property values of our collateral
dependent mortgage loans. In addition, when available, BPOs are used in various loss mitigation, default
management and portfolio monitoring efforts, allowance for loan losses modeling and CLTV estimates. The
Company validates BPOs through quality control measures, including comparison to tax records,
comparable sale and listing data, prior BPO values and original appraisals. The Company does not adjust
BPO values but will only utilize BPOs that pass validation.
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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, 2016 and 2015:
December 31, 2016
Loans receivable:
One- to four-family
Home equity
Real estate owned
December 31, 2015
Loans receivable:
One- to four-family
Home equity
Real estate owned
Unobservable Inputs
Average
Range
Appraised value
Appraised value
Appraised value
Appraised value
Appraised value
Appraised value
$
$
$
$
$
$
408,100
312,000
342,300
$50,000-$1,490,000
$6,000-$2,500,000
$21,500-$1,800,000
422,900
274,100
330,700
$8,500-$1,900,000
$9,000-$1,300,000
$26,500-$1,250,000
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Recurring and Nonrecurring Fair Value Measurements
Assets and liabilities measured at fair value at December 31, 2016 and 2015 are summarized in the following
tables (dollars in millions):
Level 1
Level 2
Level 3
Total
Fair Value
December 31, 2016:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities
$
— $
12,634
$
— $
12,634
Agency debentures
U.S. Treasuries
Agency debt securities
Municipal 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
—
—
—
—
—
7
7
—
788
407
24
32
13,885
—
13,885
165
—
—
—
—
—
—
—
—
788
407
24
32
13,885
7
13,892
165
$
$
$
$
7
$
14,050
$
— $
14,057
— $
— $
31
31
$
$
— $
— $
—
—
—
—
—
—
— $
— $
$
25
21
46
35
31
31
25
21
46
35
Total assets measured at fair value on a nonrecurring
basis(3)
$
— $
— $
81
$
81
(1) All derivative assets and liabilities were interest rate contracts at December 31, 2016. Information related to derivative
instruments is detailed in Note 9—Derivative Instruments and Hedging Activities.
(2) Assets and liabilities measured at fair value on a recurring basis represented 29% and less than 1% of the Company’s total
assets and total liabilities, respectively, at December 31, 2016.
(3) Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance
sheet at December 31, 2016, and for which a fair value measurement was recorded during the period.
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December 31, 2015:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Debt securities:
Level 1
Level 2
Level 3
Total
Fair Value
Agency mortgage-backed securities
$
— $
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
—
—
—
—
—
—
—
—
—
557
143
55
35
4
12,557
32
12,589
10
$
$
$
$
32
$
12,567
$
— $
12,599
— $
— $
55
55
$
$
— $
— $
—
—
—
—
—
—
— $
— $
$
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 9—Derivative Instruments and Hedging Activities.
(2) Assets and liabilities measured at fair value on a recurring basis represented 28% and less than 1% of the Company’s total
assets and total liabilities, respectively, at December 31, 2015.
(3) Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance
sheet at December 31, 2015, and for which a fair value measurement was recorded during the period.
The following table presents gains and losses recognized on assets measured at fair value on a
nonrecurring basis during the years ended December 31, 2016, 2015 and 2014 (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
Year Ended December 31,
2016
2015
2014
$
$
$
4
$
12
16
$
— $
7
$
14
21
$
— $
10
30
40
(2)
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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, 2016 and 2015.
Recurring Fair Value Measurements Categorized within Level 3
For the periods presented, no assets or liabilities measured at fair value on a recurring basis were
categorized within Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments Not Carried at Fair Value
The following table summarizes the carrying values, fair values and fair value hierarchy level classification
of financial instruments that are not carried at fair value on the consolidated balance sheet at December
31, 2016 and 2015 (dollars in millions):
Assets
Cash and equivalents
Cash required to be segregated under federal or
other regulations
Held-to-maturity securities:
December 31, 2016
Carrying
Value
Level 1
Level 2
Level 3
Total
Fair Value
$
$
1,950
1,460
$
$
1,950
1,460
$
$
— $
— $
1,950
— $
— $
1,460
Agency mortgage-backed securities
$ 12,868
$
— $ 12,839
$
— $
12,839
Agency debentures
Agency debt securities
29
2,854
—
—
29
2,848
—
—
29
2,848
Total held-to-maturity securities
$ 15,751
$
$
— $ 15,716
— $
6,731
$
$
— $
15,716
— $
6,731
6,731
Margin receivables
Loans receivable, net:
One- to four-family
Home equity
Consumer
Total loans receivable, net(1)
Receivables from brokers, dealers and clearing
organizations
Liabilities
Deposits
Customer payables
Payables to brokers, dealers and clearing
organizations
Trust preferred securities
Corporate debt
$
$
$
$
1,385
248
3,551
1,056
$ 31,682
$
$
$
$
8,159
983
409
994
$
$
$
$
$
$
$
1,918
$
— $
— $
1,942
$
1,942
1,311
249
—
—
—
—
1,311
249
— $
— $
3,502
$
3,502
— $
1,056
$
— $
1,056
$
$
$
— $ 31,681
— $
8,159
— $
31,681
— $
8,159
— $
— $
983
— $
— $
288
$
983
288
— $
1,050
$
— $
1,050
(1) The carrying value of loans receivable, net includes the allowance for loan losses of $221 million and loans that are recorded at
fair value on a nonrecurring basis at December 31, 2016.
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Assets
Cash and equivalents
Cash required to be segregated under federal or
other regulations
Held-to-maturity securities:
December 31, 2015
Carrying
Value
Level 1
Level 2
Level 3
Total
Fair Value
$
$
2,233
1,057
$
$
2,233
1,057
$
$
— $
— $
2,233
— $
— $
1,057
Agency mortgage-backed securities
$ 10,353
$
— $ 10,444
$
— $
10,444
Agency debentures
Agency debt securities
Other non-agency debt securities
127
2,523
10
—
—
—
125
2,544
—
Total held-to-maturity securities
$ 13,013
$
$
— $ 13,113
— $
7,398
$
$
7,398
—
—
10
10
125
2,544
10
$
13,123
— $
7,398
Margin receivables
Loans receivable, net:
One- to four-family
Home equity
Consumer
Total loans receivable, net(1)
Receivables from brokers, dealers and clearing
organizations
Liabilities
Deposits
Customer Payables
Payables to brokers, dealers and clearing
organizations
Other borrowings:
$
$
$
$
1,810
338
4,613
520
$ 29,445
$
$
6,544
1,576
$
$
$
$
$
2,465
$
— $
— $
2,409
$
2,409
1,660
343
—
—
—
—
1,660
343
— $
— $
4,412
$
4,412
— $
520
$
— $
520
— $ 29,444
— $
6,544
— $
1,576
$
$
$
$
— $
29,444
— $
6,544
— $
1,576
— $
252
82
252
Securities sold under agreements to repurchase $
82
$
— $
Trust preferred securities
409
—
82
—
Total other borrowings
334
1,055
(1) The carrying value of loans receivable, net includes the allowance for loan losses of $353 million and loans that are recorded at
Corporate debt
— $
— $
— $
1,055
252
997
491
82
$
$
$
$
$
$
$
fair value on a nonrecurring basis at December 31, 2015.
The fair value measurement techniques for financial instruments not carried at fair value on the
consolidated balance sheet at December 31, 2016 and 2015 are summarized as follows:
Cash and equivalents, cash required to be segregated under federal or other regulations, margin
receivables, receivables from brokers, dealers and clearing organizations, customer payables and payables
to brokers, dealers and clearing organizations—Due to their short term nature, fair value is estimated to be
carrying value.
Held-to-maturity securities—The held-to-maturity securities portfolio included agency mortgage-backed
securities, agency debentures, agency debt securities, and other non-agency debt securities. The fair value
of agency mortgage-backed securities is determined consistently with the pricing of available-for-sale
securities described above.
Loans receivable, net—Fair value is estimated using a discounted cash flow model. Loans are differentiated
based on their individual portfolio characteristics, such as product classification, loan category and pricing
features. Assumptions for expected losses, prepayments, cash flows and discount rates are adjusted to
reflect the individual characteristics of the loans, such as credit risk, coupon, lien position, and payment
characteristics, as well as the secondary market conditions for these types of loans.
Although the market for one- to four-family and home equity loan portfolios has improved, given the lack of
observability of valuation inputs, these fair value measurements cannot be determined with precision and
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changes in the underlying assumptions used, including discount rates, could significantly affect the results
of current or future fair value estimates. In addition, the amount that would be realized in a forced
liquidation, an actual sale or immediate settlement could be lower than both the carrying value and the
estimated fair value of the portfolio.
Deposits—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. For the remainder of deposits, fair value is the amount payable on demand at the reporting date.
Securities sold under agreements to repurchase—Fair value for securities sold under agreements to
repurchase was determined by discounting future cash flows using discount factors derived from current
observable rates implied for other similar instruments with similar remaining maturities.
Trust preferred securities—For subordinated debentures, fair value is estimated by discounting future cash
flows at the yield implied by dealer pricing quotes.
Corporate debt—For interest-bearing corporate debt, fair value is estimated using dealer pricing quotes.
The fair value of the non-interest-bearing convertible debentures is directly correlated to the intrinsic value
of the Company’s underlying stock; therefore, as the price of the Company’s stock increases relative to the
conversion price, the fair value of the convertible debentures increases.
Fair Value of Commitments and Contingencies
In the normal course of business, the Company makes various commitments to extend credit and incur
contingent liabilities that are not reflected in the consolidated balance sheet. Changes in the economy or
interest rates may influence the impact that these commitments and contingencies have on the Company in
the future. The Company does not estimate the fair value of those commitments. The Company has the
right to cancel these commitments in certain circumstances and has closed a significant amount of
customer HELOCs in the past nine years. Information related to such commitments and contingent liabilities
is included in Note 21—Commitments, Contingencies and Other Regulatory Matters.
NOTE 6—OFFSETTING ASSETS AND LIABILITIES
For financial statement purposes, the Company does not offset derivative instruments, repurchase
agreements, or securities borrowing and securities lending transactions. These activities are generally
transacted under master agreements that are widely used by counterparties and that may allow for net
settlements of payments in the normal course, as well as offsetting of all contracts with a given counterparty
in the event of bankruptcy or default of one of the two parties to the transaction. The following table
presents information about these transactions to enable the users of the Company’s financial statements to
evaluate the potential effect of rights of set-off between these recognized assets and recognized liabilities at
December 31, 2016 and 2015 (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 (1)
Financial
Instruments
Collateral
Received or
Pledged
(Including
Cash)
Net
Amount
December 31, 2016
Assets:
Deposits paid for securities
borrowed (2)
Total
Liabilities:
Deposits received for
securities loaned (3)
Derivative liabilities (4)(5)
Total
December 31, 2015
Assets:
Deposits paid for securities
borrowed (2)
Total
Liabilities:
Deposits received for
securities loaned (3)
Repurchase agreements (5)
Derivative liabilities (4)(5)
Total
$
$
$
$
$
$
$
$
774
774
$
$
— $
— $
774
774
$
$
(192) $
(192) $
(560) $
(560) $
926
$
6
932
$
— $
—
— $
926
$
(192) $
(661) $
6
—
(6)
932
$
(192) $
(667) $
22
22
73
—
73
120
120
$
$
— $
— $
120
120
$
$
(94) $
(94) $
(18) $
(18) $
8
8
1,535
$
— $
1,535
$
(94) $
(1,314) $
127
82
11
—
—
82
11
—
—
(81)
(11)
1
—
1,628
$
— $
1,628
$
(94) $
(1,406) $
128
(1) Net amount of deposits paid for securities borrowed are reflected in the receivables from brokers, dealers and clearing
organizations line item in the consolidated balance sheet. Net amount of deposits received for securities loaned, repurchase
agreements and derivative liabilities are reflected in the payables to brokers, dealers and clearing organizations, other
borrowings and other liabilities line items in the consolidated balance sheet, respectively.
(2)
(3)
Included in the gross amounts of deposits paid for securities borrowed was $307 million and $34 million at December 31, 2016
and 2015, respectively, transacted through a program with a clearing organization, which guarantees the return of cash to the
Company. For presentation purposes, these amounts presented are based on the counterparties under the Company’s master
securities loan agreements.
Included in the gross amounts of deposits received for securities loaned was $546 million and $722 million at December 31,
2016 and 2015, respectively, transacted through a program with a clearing organization, which guarantees the return of
securities to the Company. For presentation purposes, these amounts presented are based on the counterparties under the
Company’s master securities loan agreements.
(4) Excludes net accrued interest payable of $2 million and $3 million at December 31, 2016 and 2015, respectively.
(5) The collateral pledged included held-to-maturity securities at amortized cost for December 31, 2016 and available-for-sale
securities at fair value for December 31, 2015.
Derivative Transactions
Certain types of derivatives that the Company utilizes in its hedging activities are subject to derivatives
clearing agreements (cleared derivatives contracts) under the Dodd-Frank Act. These cleared derivatives
contracts enable clearing by a derivatives clearing organization through a clearing member. Under the
contracts, the clearing member typically has a one-way right to offset all contracts in the event of the
Company’s default or bankruptcy. Collateral exchanged under these contracts is not included in the table
above as the contracts may not qualify as master netting agreements. At December 31, 2016 and 2015, the
Company had $165 million and $10 million, respectively, of cleared derivative contract assets. At
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December 31, 2016 and 2015, the Company had $25 million and $44 million, respectively, of cleared
derivative contract liabilities.
Securities Lending Transactions
Deposits paid for securities borrowed and deposits received for securities loaned are recorded at the
amount of cash collateral advanced or received. Securities borrowing transactions require the Company to
deposit cash with the lender whereas securities lending transactions result in the Company receiving
collateral in the form of cash, with both requiring cash in an amount generally in excess of the market value
of the securities. These transactions have overnight or continuous remaining contractual maturities.
Securities lending transactions expose the Company to counterparty credit risk and market risk. To manage
the counterparty risk, the Company maintains internal standards for approving counterparties, reviews and
analyzes the credit rating of each counterparty, and monitors its positions with each counterparty on an
ongoing basis. In addition, for certain of the Company's securities lending transactions, the Company uses
a program with a clearing organization that guarantees the return of securities. The Company monitors the
market value of the securities borrowed and loaned using collateral arrangements that require additional
collateral to be obtained from or excess collateral to be returned to the counterparties based on changes in
market value, to maintain specified collateral levels.
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NOTE 7—AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
The amortized cost and fair value of available-for-sale and held-to-maturity securities at December 31, 2016
and 2015 are shown in the following tables (dollars in millions):
Amortized
Cost
Gross
Unrealized /
Unrecognized
Gains
Gross
Unrealized /
Unrecognized
Losses
Fair Value
December 31, 2016:
Available-for-sale securities:(1)
Debt securities:
Agency mortgage-backed securities
$
12,946
$
Agency debentures
U.S. Treasuries
Agency debt securities
Municipal bonds
Total debt securities
Publicly traded equity securities(2)
Total available-for-sale securities
Held-to-maturity securities:(1)
Agency mortgage-backed securities
Agency debentures
Agency debt securities
Total held-to-maturity securities
$
$
$
791
452
25
32
14,246
7
14,253
$
24
18
—
—
—
42
—
42
$
(336) $
12,634
(21)
(45)
(1)
—
(403)
—
788
407
24
32
13,885
7
$
(403) $
13,892
12,868
$
123
$
(152) $
12,839
29
2,854
—
26
—
(32)
29
2,848
15,751
$
149
$
(184) $
15,716
December 31, 2015:
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities
$
11,888
$
Agency debentures
U.S. Treasuries
Agency debt securities
Municipal bonds
Corporate bonds
Total debt securities
Publicly traded equity securities(2)
Total available-for-sale securities
Held-to-maturity securities:
Agency mortgage-backed securities
Agency debentures
Agency debt securities
Other non-agency debt securities
$
$
551
147
55
35
5
12,681
33
12,714
$
41
18
—
—
—
—
59
—
59
$
(166) $
11,763
(12)
(4)
—
—
(1)
(183)
(1)
557
143
55
35
4
12,557
32
$
(184) $
12,589
10,353
$
149
$
(58) $
10,444
127
2,523
10
—
34
—
(2)
(13)
—
125
2,544
10
Total held-to-maturity securities
$
13,013
$
183
$
(73) $
13,123
(1) Securities with a fair value of approximately $492 million were transferred from available-for-sale securities to held-to-maturity
securities during the year ended December 31, 2016 pursuant to an evaluation of our investment strategy and an assessment
by management about our intent and ability to hold those particular securities until maturity. See Note 17—Shareholders' Equity
for information on the impact to accumulated other comprehensive income.
(2) Consists of investments in a mutual fund related to the Community Reinvestment Act.
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Contractual Maturities
The contractual maturities of all available-for-sale and held-to-maturity debt securities at December 31,
2016 are shown in the following table (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
$
$
$
$
— $
11
4,690
9,545
14,246
$
— $
1,430
4,598
9,723
—
11
4,530
9,344
13,885
—
1,468
4,590
9,658
15,751
$
15,716
At December 31, 2016, the Company pledged $6 million of available-for-sale debt securities and $0.5 billion
of held-to-maturity debt securities as collateral. 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.
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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, 2016 and
2015 (dollars in millions):
Less than 12 Months
12 Months or More
Total
Fair Value
Unrealized /
Unrecognized
Losses
Fair Value
Unrealized /
Unrecognized
Losses
Fair Value
Unrealized /
Unrecognized
Losses
December 31, 2016:
Available-for-sale securities:
Debt securities:
Agency mortgage-backed
securities
Agency debentures
U.S. Treasuries
Agency debt securities
Municipal bonds
Publicly traded equity securities
Total temporarily impaired
available-for-sale securities
Held-to-maturity securities:
$
9,281
$
(279) $
1,620
$
(57) $
10,901
$
(336)
454
407
24
13
7
(21)
(45)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
454
407
24
13
7
(21)
(45)
(1)
—
—
$
10,186
$
(346) $
1,620
$
(57) $
11,806
$
(403)
Agency mortgage-backed securities
$
5,929
$
(123) $
1,272
$
(29) $
7,201
$
Agency debentures
Agency debt securities
18
1,739
—
(32)
—
18
—
—
18
1,757
(152)
—
(32)
Total temporarily impaired held-
to-maturity securities
$
7,686
$
(155) $
1,290
$
(29) $
8,976
$
(184)
December 31, 2015:
Available-for-sale securities:
Debt securities:
Agency mortgage-backed
securities
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:
$
6,832
$
(88) $
2,496
$
(78) $
9,328
$
329
143
55
—
—
32
(12)
(4)
—
—
—
(1)
9
—
—
15
4
—
—
—
—
—
(1)
—
338
143
55
15
4
32
(166)
(12)
(4)
—
—
(1)
(1)
$
7,391
$
(105) $
2,524
$
(79) $
9,915
$
(184)
Agency mortgage-backed securities
$
2,807
$
(25) $
1,495
$
(33) $
4,302
$
Agency debentures
Agency debt securities
114
1,006
(2)
(10)
—
134
—
(3)
114
1,140
Total temporarily impaired held-
to-maturity securities
$
3,927
$
(37) $
1,629
$
(36) $
5,556
$
(58)
(2)
(13)
(73)
The Company does not believe that any individual unrealized loss in the available-for-sale portfolio or
unrecognized loss in the held-to-maturity portfolio as of December 31, 2016 represents a credit loss. The
Company does not intend to sell the debt securities in an unrealized or unrecognized loss position as of the
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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, 2016.
There were no impairment losses recognized in earnings on available-for-sale or held-to-maturity securities
during the years ended December 31, 2016, 2015 or 2014.
The Company holds securities that have been written down to zero carrying value. The credit loss
component of debt securities held by the Company that had a noncredit loss component previously
recognized in other comprehensive income decreased to $136 million at December 31, 2016 from $152
million at both December 31, 2015 and 2014, as a result of the sale and pay off of our remaining impaired
securities during 2016. Of these amounts, $136 million at December 31, 2016 and $123 million at both
December 31, 2015 and 2014 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, Net
The following table shows the components of the gains (losses) on securities and other, net line items on
the consolidated statement of income for the years ended December 31, 2016, 2015 and 2014 (dollars in
millions):
Year Ended December 31,
2016
2015
2014
Reclassification of deferred losses on cash flow hedges
$
— $
(370) $
Gains on available-for-sale securities, net:
Gains on available-for-sale securities
Losses on available-for-sale securities
Subtotal
Hedge ineffectiveness
Equity method investment income (loss) and other
54
(1)
53
(6)
(5)
58
(20)
38
(1)
9
Gains (losses) on securities and other, net
$
42
$
(324) $
NOTE 8—LOANS RECEIVABLE, NET
Loans receivable, net at December 31, 2016 and 2015 are summarized as follows (dollars in
millions):
One- to four-family
Home equity
Consumer
Total loans receivable
Unamortized premiums, net
Allowance for loan losses
Total loans receivable, net
December 31,
2016
2015
$
$
1,950
$
1,556
250
3,756
16
(221)
3,551
$
—
42
—
42
(10)
7
39
2,488
2,114
341
4,943
23
(353)
4,613
At December 31, 2016, the Company pledged $3.1 billion and $0.3 billion of loans as collateral to the FHLB
and Federal Reserve Bank, respectively. At December 31, 2015, the Company pledged $4.2 billion and
$0.3 billion of loans as collateral to the FHLB and Federal Reserve Bank, respectively.
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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, 2016 and 2015 (dollars in millions):
Recorded Investment
Allowance for Loan Losses
December 31,
December 31,
2016
2015
2016
2015
Collectively evaluated for impairment:
One- to four-family
Home equity
Consumer
Total collectively evaluated for impairment
Individually evaluated for impairment:
One- to four-family
Home equity
Total individually evaluated for impairment
$
1,717
$
2,219
$
38
$
1,361
253
3,331
246
195
441
1,915
344
4,478
286
202
488
120
5
163
7
51
58
Total
$
3,772
$
4,966
$
221
$
31
255
6
292
9
52
61
353
Credit Quality and Concentrations of Credit Risk
The Company tracks and reviews factors to predict and monitor credit risk in its mortgage loan portfolio on
an ongoing basis. These factors include: loan type, estimated current LTV/CLTV ratios, delinquency history,
borrowers’ current credit scores, housing prices, loan vintage and geographic location of the property. The
Company believes LTV/CLTV ratios and credit scores are the key factors in determining future loan
performance. The factors are updated on at least a quarterly basis. The Company tracks and reviews
delinquency status to predict and monitor credit risk in the consumer loan portfolio on at least a quarterly
basis.
Credit Quality
The following tables show the distribution of the Company’s mortgage loan portfolios by credit quality
indicator at December 31, 2016 and 2015 (dollars in millions):
Current LTV/CLTV (1)
<=80%
80%-100%
100%-120%
>120%
Total mortgage loans receivable
Average estimated current LTV/CLTV (2)
Average LTV/CLTV at loan origination (3)
One- to Four-Family
December 31,
Home Equity
December 31,
2016
2015
2016
2015
$
1,308
$
1,519
$
413
143
86
609
227
133
$
686
414
274
182
843
549
420
302
$
1,950
$
2,488
$
1,556
$
2,114
73%
71%
77%
71%
87%
81%
90%
81%
(1) Current CLTV calculations for home equity loans are based on the maximum available line for HELOCs and outstanding
principal balance for home equity installment loans. For home equity loans in the second lien position, the original balance of
the first lien loan at origination date and updated valuations on the property underlying the loan are used to calculate CLTV.
Current property value estimates are updated on a quarterly basis.
(2) The average estimated current LTV/CLTV ratio reflects the outstanding balance at the balance sheet date and the maximum
available line for HELOCs, divided by the estimated current value of the underlying property.
(3) Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family
purchased loans and home equity installment loans and maximum available line for HELOCs.
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Current FICO (1)
>=720
719 - 700
699 - 680
679 - 660
659 - 620
<620
One- to Four-Family
December 31,
Home Equity
December 31,
2016
2015
2016
2015
$
1,121
$
1,423
$
179
153
121
154
222
246
198
150
198
273
778
156
141
117
149
215
$
1,069
222
183
152
203
285
Total mortgage loans receivable
$
1,950
$
2,488
$
1,556
$
2,114
(1) FICO scores are updated on a quarterly basis; however, there were approximately $28 million and $39 million of one- to four-
family loans at December 31, 2016 and 2015, respectively, and $2 million and $3 million of home equity loans at December 31,
2016 and 2015, respectively, for which the updated FICO scores were not available. For these loans, the current FICO
distribution included the most recent FICO scores where available, otherwise the original FICO score was used.
Concentrations of Credit Risk
One- to four-family loans include loans for a five to ten year interest-only period, followed by an amortizing
period ranging from 20 to 25 years. At December 31, 2016, 24% of the Company's one- to four-family
portfolio was not yet amortizing. During the year ended December 31, 2016, borrowers of approximately
14% of the portfolio made voluntary annual principal payments of at least $2,500 and of this population,
nearly half made principal payments that were $10,000 or greater.
The home equity loan portfolio is primarily second lien loans on residential real estate properties, which
have a higher level of credit risk than first lien mortgage loans. Approximately 13% of the home equity
portfolio was in the first lien position and the Company holds both the first and second lien positions in less
than 1% of the home equity loan portfolio at December 31, 2016. The home equity loan portfolio consists of
approximately 18% of home equity installment loans and approximately 82% of HELOCs at December 31,
2016.
Home equity installment loans are primarily fixed rate and fixed term, fully amortizing loans that do not offer
the option of an interest-only payment. The majority of HELOCs have an interest only draw period and
convert to amortizing loans at the end of the draw period, which typically ranges from five to ten years. At
December 31, 2016, less than 1% of this portfolio will require the borrowers to repay the loan in full at the
end of the draw period. At December 31, 2016, 15% of the HELOC portfolio had not converted from the
interest-only draw period to amortizing. During the year ended December 31, 2016, borrowers of
approximately 39% of the portfolio made annual principal payments of at least $500 on their HELOCs and
slightly under half reduced their principal balance by at least $2,500.
The following table outlines when one- to four-family and HELOCs convert to amortizing by percentage of
the one- to four-family portfolio and HELOC portfolios, respectively, at December 31, 2016:
Period of Conversion to Amortizing Loan
Already amortizing
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
76%
24%
—%
85%
14%
1%
The average age of our mortgage loans receivable was 10.8 and 9.9 years at December 31, 2016 and
2015, respectively. Approximately 36% and 37% of the Company’s mortgage loans receivable were
concentrated in California at December 31, 2016 and 2015, respectively. No other state had concentrations
of mortgage loans that represented 10% or more of the Company’s mortgage loans receivable at December
31, 2016 and 2015.
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Delinquent Loans
The following table shows total loans receivable by delinquency category at December 31, 2016 and 2015
(dollars in millions):
December 31, 2016
One- to four-family
Home equity
Consumer
Total loans receivable
December 31, 2015
One- to four-family
Home equity
Consumer
Total loans receivable
Current
30-89 Days
Delinquent
90-179 Days
Delinquent
180+ Days
Delinquent
Total
$
$
$
$
1,774
$
1,442
245
$
67
43
4
$
23
18
1
$
86
53
—
3,461
$
114
$
42
$
139
$
2,279
$
1,978
334
$
72
52
6
26
31
1
$
111
$
53
—
4,591
$
130
$
58
$
164
$
1,950
1,556
250
3,756
2,488
2,114
341
4,943
Loans delinquent 180 days and greater have been written down to their expected recovery value. Loans
delinquent 90 to 179 days generally have not been written down to their expected recovery value (unless
they are in process of bankruptcy or are modifications for which there is substantial doubt as to the
borrower’s ability to repay the loan), but present a risk of future charge-off. Additional charge-offs on loans
delinquent 180 days and greater are possible if home prices decline beyond current estimates.
The Company monitors loans in which a borrower’s current credit history casts doubt on their ability to
repay a loan. Loans are classified as special mention when they are between 30 and 89 days past due. The
trend in special mention loan balances is generally indicative of the expected trend for charge-offs in future
periods, as these loans have a greater propensity to migrate into nonaccrual status and ultimately charge-
off. One- to four-family loans are generally secured in a first lien position by real estate assets, reducing the
potential loss when compared to an unsecured loan. Home equity loans are generally secured by real
estate assets; however, the majority of these loans are secured in a second lien position, which
substantially increases the potential loss when compared to a first lien position. The loss severity of our
second lien home equity loans was approximately 92% for a trailing twelve-month period as of
December 31, 2016.
Nonperforming Loans
The Company classifies loans as nonperforming when they are no longer accruing interest, which includes
loans that are 90 days and greater past due, TDRs that are on nonaccrual status for all classes of loans
(including loans in bankruptcy) and certain junior liens that have a delinquent senior lien. The following table
shows the comparative data for nonperforming loans at December 31, 2016 and 2015 (dollars in millions):
One- to four-family
Home equity
Consumer
Total nonperforming loans receivable
December 31,
2016
2015
$
$
$
215
136
1
352
$
263
154
1
418
Real Estate Owned and Loans with Formal Foreclosure Proceedings in Process
At December 31, 2016 and 2015, the Company held $35 million and $27 million, respectively, of real estate
owned that were acquired through foreclosure or through a deed in lieu of foreclosure or similar legal
agreement. The Company also held $112 million and $108 million of loans for which formal foreclosure
proceedings were in process at December 31, 2016 and 2015, respectively.
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Allowance for Loan Losses
The following table provides a roll forward by loan portfolio of the allowance for loan losses for the years
ended December 31, 2016, 2015 and 2014 (dollars in millions):
Year Ended December 31, 2016
One- to
Four-Family
Home
Equity
Consumer
Total
Allowance for loan losses, beginning of period
$
40
$
307
$
Provision (benefit) for loan losses
Charge-offs
Recoveries
Net (charge-offs) recoveries
(2)
(1)
8
7
(148)
(17)
29
12
$
6
1
(7)
5
(2)
Allowance for loan losses, end of period $
45
$
171
$
5
$
Year Ended December 31, 2015
One- to
Four-Family
Home
Equity
Consumer
Total
Allowance for loan losses, beginning of period
$
Provision (benefit) for loan losses
Charge-offs
Recoveries
Net (charge-offs) recoveries
27
15
(2)
—
(2)
$
367
$
(55)
(31)
26
(5)
$
10
—
(11)
7
(4)
Allowance for loan losses, end of period $
40
$
307
$
6
$
Year Ended December 31, 2014
One- to
Four-Family
Home
Equity
Consumer
Total
Allowance for loan losses, beginning of period
$
102
$
326
$
25
$
Provision (benefit) for loan losses
Charge-offs
Recoveries
Net (charge-offs) recoveries
(42)
(44)
11
(33)
82
(65)
24
(41)
(4)
(17)
6
(11)
Allowance for loan losses, end of period $
27
$
367
$
10
$
353
(149)
(25)
42
17
221
404
(40)
(44)
33
(11)
353
453
36
(126)
41
(85)
404
Total loans receivable designated as held-for-investment decreased $1.1 billion during the year ended
December 31, 2016. The allowance for loan losses was $221 million, or 5.8% of total loans receivable, as of
December 31, 2016 compared to $353 million, or 7.1% of total loans receivable, as of December 31, 2015.
The benefit for loan losses was $149 million for the year ended December 31, 2016. The quantitative
allowance methodology continues to include the identification of higher risk mortgage loans and the period
of forecasted loan losses captured within the general allowance includes the total probable loss over the
remaining life of these loans. The current period provision benefit of $149 million includes the impact of
updated expectations based on the sustained outperformance of a substantial volume of HELOCs, which
resulted in a $25 million decrease to the allowance as of December 31, 2016. The current year benefit also
reflected recoveries in excess of prior expectations, including recoveries of previous charge-offs that were
not included in our loss estimates, as well as payoffs on loans converting to amortizing.
Impaired Loans—Troubled Debt Restructurings
TDRs include two categories of loans: (1) loan modifications completed under the Company’s programs that
involve granting an economic concession to a borrower experiencing financial difficulty, and (2) loans that
have been charged off based on the estimated current value of the underlying property less estimated
selling costs due to bankruptcy notification.
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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, 2016 and 2015 (dollars in millions):
Nonaccrual TDRs
Accrual
TDRs(1)
Current(2)
30-89 Days
Delinquent
90-179
Days
Delinquent
180+ Days
Delinquent
Total
Recorded
Investment in
TDRs (3)(4)
$
$
$
$
97
$
119
216
106
120
226
$
$
$
$
90
41
131
$
106
$
42
148
$
16
10
26
19
11
30
$
$
$
$
$
8
4
12
$
$
8
8
16
$
35
21
56
47
21
68
$
$
$
$
246
195
441
286
202
488
December 31, 2016
One- to four-family
Home equity
Total
December 31, 2015
One- to four-family
Home equity
Total
(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 $243 million and $283 million at December 31, 2016 and 2015,
respectively. For home equity loans, the recorded investment in TDRs represents the unpaid principal balance.
(4) Total recorded investment in TDRs at December 31, 2016 consisted of $316 million of loans modified as TDRs and $125 million
of loans that have been charged off due to bankruptcy notification. Total recorded investment in TDRs at December 31, 2015
consisted of $334 million of loans modified as TDRs and $154 million of loans that have been charged off due to bankruptcy
notification.
The following table shows the average recorded investment and interest income recognized both on a cash
and accrual basis for the Company’s TDRs during the years ended December 31, 2016, 2015 and 2014
(dollars in millions):
One- to four-family
Home equity
Total
Average Recorded Investment
Interest Income Recognized
December 31,
December 31,
2016
2015
2014
2016
2015
2014
$
$
269
204
473
$
$
303
213
516
$
$
576
227
803
$
$
11
17
28
$
$
9
$
17
26
$
16
18
34
Included in the allowance for loan losses was a specific valuation allowance of $58 million and $61 million
that was established for TDRs at December 31, 2016 and 2015, respectively. The specific allowance for
these individually impaired loans represents the forecasted losses over the estimated remaining life of the
loans, including the economic concessions granted to the borrowers. The following table shows detailed
information related to the Company’s TDRs at December 31, 2016 and 2015 (dollars in millions):
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December 31, 2016
December 31, 2015
Recorded
Investment
in TDRs
Specific
Valuation
Allowance
Net
Investment
in TDRs
Recorded
Investment
in TDRs
Specific
Valuation
Allowance
Net
Investment
in TDRs
With a recorded allowance:
One- to four-family
Home equity
Without a recorded
allowance:(1)
One- to four-family
Home equity
Total:
One- to four-family
Home equity
$
$
$
$
$
$
61
111
185
84
246
195
$
$
$
$
$
$
7
51
$
$
— $
— $
7
51
$
$
54
60
185
84
239
144
$
$
$
$
$
$
72
111
214
91
286
202
$
$
$
$
$
$
9
52
$
$
— $
— $
9
52
$
$
63
59
214
91
277
150
(1) Represents loans where the discounted cash flow analysis or collateral value is equal to or exceeds the recorded investment in
the loan.
Troubled Debt Restructurings — Loan Modifications
The Company has loan modification programs that focus on the mitigation of potential losses in the one- to
four-family and home equity mortgage loan portfolio. The Company currently does not have an active loan
modification program for consumer loans. The various types of economic concessions that may be granted
in a loan modification typically consist of interest rate reductions, maturity date extensions, principal
forgiveness or a combination of these concessions. The Company uses specialized servicers that focus on
loan modifications and pursue trial modifications for loans that are more than 180 days delinquent. Trial
modifications are classified immediately as TDRs and continue to be reported as delinquent until the
successful completion of the trial period, which is typically 90 days. The loan then becomes a permanent
modification reported as current but remains on nonaccrual status until six consecutive payments have
been made.
The following table shows loans modified as TDRs by delinquency category at December 31, 2016 and
2015 (dollars in millions):
December 31, 2016
One- to four-family
Home equity
Total
December 31, 2015
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(1)
$
$
$
$
127
141
268
138
139
277
$
$
$
$
$
8
8
16
$
11
$
8
19
$
$
$
$
4
3
7
5
6
11
$
14
11
25
16
11
27
$
$
$
$
153
163
316
170
164
334
(1)
Includes loans modified as TDRs that also had received a bankruptcy notification of $44 million and $42 million at
December 31, 2016 and 2015, respectively.
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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, 2016 and 2015 (dollars in millions):
Recorded
Investment in
Modifications
before
Charge-offs
Charge-offs
Recorded
Investment in
Modifications
Specific
Valuation
Allowance
Net Investment
in
Modifications
Specific
Valuation
Allowance
as a % of
Modifications
Total
Expected
Losses
December 31, 2016
One- to four-family
Home equity
Total
December 31, 2015
One- to four-family
Home equity
Total
$
$
$
$
198
271
469
216
284
500
$
$
$
$
(45) $
(108)
(153) $
(46) $
(120)
(166) $
153
163
316
170
164
334
$
$
$
$
(7) $
(51)
(58) $
(9) $
(52)
(61) $
146
112
258
161
112
273
4%
31%
18%
5%
32%
18%
26%
59%
45%
25%
61%
45%
The recorded investment in loans modified as TDRs includes the charge-offs related to certain loans that
were written down to the estimated current value of the underlying property less estimated selling costs.
These charge-offs were recorded on modified loans that were delinquent in excess of 180 days, in
bankruptcy, or when certain characteristics of the loan, including CLTV, borrower’s credit and type of
modification, cast substantial doubt on the borrower’s ability to repay the loan. The total expected loss on
loans modified as TDRs includes both the previously recorded charge-offs and the specific valuation
allowance.
The vast majority of the Company’s loans modified as TDRs include an interest rate reduction in
combination with another type of concession. The Company prioritizes the interest rate reduction
modifications in combination with the other modification categories. Each class is mutually exclusive in that
if a modification had an interest rate reduction with an extension and other modification, the modification
would only be presented in the extension column in the table below. The following tables provide the
number of loans and post-modification balances immediately after being modified by major class during the
years ended December 31, 2016, 2015 and 2014 (dollars in millions):
Year Ended December 31, 2016
Interest Rate Reduction
Number
of
Loans
Principal
Forgiven
Principal
Deferred
Re-age/
Extension/
Interest
Capitalization
Other with
Interest Rate
Reduction
One- to four-family
Home equity
Total
47
$
518
565
$
1
—
1
$
$
— $
—
— $
$
8
8
16
$
2
3
5
Other(1)
7
$
25
32
$
$
$
Total
18
36
54
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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
One- to four-family
Home equity
Total
34
367
401
$
$
— $
—
— $
1
—
1
$
$
9
3
12
$
$
Other(1)
3
19
22
— $
2
2
$
Total
$
$
13
24
37
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
(1)
Includes TDRs that resulted from a loan modification program being offered to a subset of borrowers with HELOCs whose
original loan terms provided the borrowers the option to accelerate their date of conversion to amortizing loans. As certain
terms of the Company's offer represented economic concessions, such as longer amortization periods than were in the original
loan agreements, to certain borrowers experiencing financial difficulty, this program resulted in $15 million and $14 million of
TDRs during the years ended December 31, 2016 and 2015, respectively.
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, 2016, 2015 and 2014
(dollars in millions):
Year Ended December 31,
2016
2015
2014
Number
of Loans
Recorded
Investment
Number
of Loans
Recorded
Investment
Number
of Loans
Recorded
Investment
20
63
83
$
$
6
5
11
7
$
90
97
$
3
5
8
27
55
82
$
$
9
3
12
One- to four-family(1)
Home equity(2)(3)
Total
(1) For the years ended December 31, 2016, 2015, and 2014, $1 million, less than $1 million and $1 million, respectively, of the
recorded investment in one- to four-family loans had a payment default in the trailing 12 months that was classified as current.
(2) For the years ended December 31, 2016, 2015, and 2014, $2 million, $3 million and $1 million, respectively, of the recorded
investment in home equity loans had a payment default in the trailing 12 months that 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 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into derivative transactions primarily to protect against interest rate risk on the value of
certain assets, liabilities and future cash flows. Each derivative instrument is recorded on the consolidated
balance sheet at fair value as a freestanding asset or liability. The following table summarizes the fair value
of derivatives as reported in the consolidated balance sheet at December 31, 2016 and 2015 (dollars in
millions):
December 31, 2016
Interest rate contracts:
Fair value hedges
Total derivatives designated as hedging
instruments(4)
December 31, 2015
Interest rate contracts:
Fair value hedges
Total derivatives designated as hedging
instruments(4)
Notional
Asset(1)
Fair Value
Liability(2)
Net(3)
$
$
$
$
3,862
3,862
2,204
2,204
$
$
$
$
165
165
10
10
$
$
$
$
(31) $
(31) $
134
134
(55) $
(45)
(55) $
(45)
(1) Reflected in the other assets line item on the consolidated balance sheet.
(2) Reflected in the other liabilities line item on the consolidated balance sheet.
(3) Represents net fair value of derivative instruments for disclosure purposes only.
(4) All derivatives were designated as hedging instruments at December 31, 2016 and 2015.
Cash Flow Hedges
The Company terminated $4.4 billion of legacy wholesale funding obligations during the third quarter of
2015 along with the cash flow hedges used to hedge the forecasted transactions related to these
obligations. As the Company's intent changed and the hedged forecasted transactions became probable of
not occurring, the Company reclassified $370 million of pre-tax losses on cash flow hedges from
accumulated other comprehensive loss into earnings during the year ended December 31, 2015. See Note
14—Other Borrowings for additional information.
Fair Value Hedges
Fair value hedges are used to offset exposure to changes in value of certain fixed-rate assets and liabilities.
Fair value hedges are accounted for by recording the fair value of the derivative instrument and the fair
value of the asset or liability being hedged on the consolidated balance sheet. Changes in the fair value of
both the derivative instruments and the underlying assets or liabilities are recognized in the gains (losses)
on securities and other, net line item in the consolidated statement of income. To the extent that the hedge
is ineffective, the changes in the fair values will not offset and the difference, or hedge ineffectiveness, is
reflected in the gains (losses) on securities and other, net line item in the consolidated statement of income.
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, net line item in the consolidated statement of
income.
The following table summarizes the effect of interest rate contracts designated as fair value hedges and
related hedged items on the consolidated statement of income for the years ended December 31, 2016,
2015 and 2014 (dollars in millions):
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Year Ended December 31,
2016
2015
Hedging
Instrument
Hedged
Item
Hedge
Ineffectiveness(1)
Hedging
Instrument
Hedged
Item
Agency debentures
$
28
$
(32) $
(4) $
(3) $
Agency mortgage-
backed securities
Total gains (losses)
included in earnings $
42
(44)
(2)
(4)
70
$
(76) $
(6) $
(7) $
3
3
6
Hedge
Ineffectiveness(1)
—
$
(1)
(1)
$
Year Ended December 31,
2014
Hedging
Instrument
Hedged
Item
Agency debentures
$
(100) $
Agency mortgage-
backed securities
(33)
91
32
Total gains (losses)
included in earnings $
(133) $
123
$
Hedge
Ineffectiveness(1)
(9)
$
(1)
(10)
(1) Reflected in the gains (losses) on securities and other, net line item on the consolidated statement of income.
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 $20
million of its mortgage-backed securities as collateral related to its derivative contracts in net liability
positions to counterparties at December 31, 2016.
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, 2016, 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 contracts
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 contracts, the counterparties to the derivative
instruments could request payment or collateralization on the 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 $6 million at December 31, 2016. The fair value of the Company’s mortgage-backed securities pledged
as collateral related to derivative contracts in net liability positions to counterparties, was $20 million at
December 31, 2016, which exceeded derivative instruments in net liability positions at the counterparty level
by $14 million.
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NOTE 10—PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following assets at December 31, 2016 and 2015 (dollars in
millions):
December 31, 2016
December 31, 2015
Accumulated
Depreciation
and
Amortization
Gross
Amount
Net
Amount
Gross
Amount
Accumulated
Depreciation
and
Amortization
Net
Amount
Software
Leasehold
improvements
Equipment
Buildings
Furniture and fixtures
Land
Construction in
progress(1)
Total
$
449
$
(355) $
94
$
468
$
(388) $
119
133
72
19
3
35
(97)
(92)
(30)
(17)
—
—
22
41
42
2
3
35
116
127
72
22
3
39
(91)
(84)
(28)
(20)
—
—
$
830
$
(591) $
239
$
847
$
(611) $
80
25
43
44
2
3
39
236
(1) Construction in progress includes software in the process of development of $22 million at both December 31, 2016 and 2015.
Depreciation and amortization expense related to property and equipment was $79 million, $81 million and
$78 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Software includes capitalized internally developed software costs of $46 million, $42 million and $27 million
for the years ended December 31, 2016, 2015 and 2014, respectively. Amortization of completed and in-
service software was $36 million, $41 million and $47 million for the years ended December 31, 2016, 2015
and 2014, respectively.
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,
2017
2018
2019
2020
2021
Thereafter
Total
Obligation for
Minimum Lease
Payments
Minimum
Sublease
Proceeds
$
$
$
4
5
5
5
5
14
38
$
(3)
(3)
(3)
(3)
(3)
(3)
(18)
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NOTE 11—GOODWILL AND OTHER INTANGIBLES, NET
Goodwill
At December 31, 2016 and 2015 the Company had goodwill of $2.4 billion and $1.8 billion, respectively.
The increase as of December 31, 2016 was the result of $578 million in goodwill recognized in connection
with the OptionsHouse acquisition. See Note 2—Business Acquisition for additional information.
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. There were no impairments to the
carrying value of the Company’s goodwill during the years ended December 31, 2016, 2015 and 2014.
As a result of the changes that drove the update in the Company's segment reporting structure in 2016, the
Company no longer has separate reporting units. For the year ended December 31, 2016, the Company
elected to perform a qualitative analysis to determine whether it was more likely than not that the fair value
of its equity was less than the carrying value. As a result of this assessment, the Company determined that
it was not necessary to perform a quantitative impairment test and concluded that its goodwill was not
impaired at December 31, 2016.
For the year ended December 31, 2015, the Company elected to perform a quantitative analysis for the
retail brokerage reporting unit, to which all of its $1.8 billion of goodwill was allocated, to determine whether
the fair value was less than the carrying value. As a result of this assessment, the Company concluded that
its goodwill was not impaired at December 31, 2015.
At both December 31, 2016 and 2015, goodwill was net of accumulated impairment losses of $243 million.
Other Intangibles, Net
At December 31, 2016 and 2015, the Company had other intangible assets of $320 million and $174
million, respectively. The increase as of December 31, 2016 was the result of $169 million in other
intangible assets recognized in connection with the OptionsHouse acquisition. See Note 2—Business
Acquisition for additional information.
The following table outlines the Company's other intangible assets with finite lives (dollars in millions):
December 31, 2016
Weighted Average
Original
Useful Life
(Years)
Weighted Average
Remaining
Useful Life
(Years)
Gross Amount
Accumulated
Amortization
Net Amount
18
7
2
11
7
2
553
48
3
(281)
(2)
(1)
$
604
$
(284) $
272
46
2
320
December 31, 2015
Weighted Average
Original
Useful Life
(Years)
Weighted Average
Remaining
Useful Life
(Years)
Gross Amount
Accumulated
Amortization
Net Amount
20
10
$
435
$
(261) $
174
Customer
relationships
Technology
Trade name
Total
Customer
relationships
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Customer relationship intangibles are amortized on an accelerated basis, while technology and trade name
intangibles are amortized on a straight-line basis. Assuming no future impairments of other intangibles or
additional acquisitions or dispositions, the following table presents the Company's future annual
amortization expense (dollars in millions):
Years ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total future amortization expense
$
$
36
40
39
37
35
133
320
NOTE 12—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
NOTE 13—DEPOSITS
December 31,
2016
2015
$
$
$
$
$
774
231
51
1,056
$
926
$
7
50
983
$
120
341
59
520
1,535
8
33
1,576
Deposits are summarized as follows (dollars in millions):
Sweep deposits
Savings deposits
Other deposits(1)
Total deposits(2)
Amount
December 31,
Weighted-Average Rate
December 31,
2016
2015
2016
2015
$
$
26,362
$
3,185
2,135
31,682
$
24,018
3,357
2,070
29,445
0.01%
0.01%
0.03%
0.01%
0.01%
0.01%
0.03%
0.01%
(1)
Includes checking deposits, money market and time deposits.
(2) As of December 31, 2016 and 2015, the Company had $177 million and $173 million in non-interest bearing deposits,
respectively.
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NOTE 14—OTHER BORROWINGS
Other borrowings at December 31, 2016 and 2015 are summarized as follows (dollars in millions):
Trust preferred securities(1)
Repurchase agreements(2)
Total other borrowings
December 31,
2016
2015
$
$
409
$
—
409
$
409
82
491
(1) The Company's TRUPs begin maturing in 2031.
(2) The maximum amount at any month end for repurchase agreements was $3.8 billion for the year ended December 31, 2015.
The Company terminated $4.4 billion of legacy wholesale funding obligations during 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, net line item, and $370 million
in the gains (losses) on securities and other, net line item that was reclassified from accumulated other
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 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, 2016 are shown below (dollars in millions):
Trusts
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
Face Value
Maturity
Date
20
51
65
77
60
45
96
2031
2032
2033
2034
2035
2036
2037
Annual Interest Rate
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
Total
$
414
External Lines of Credit maintained at E*TRADE Securities
E*TRADE Securities' external liquidity lines total approximately $1.1 billion as of December 31, 2016 and
include the following:
• A 364-day, $400 million senior unsecured committed revolving credit facility with a syndicate of banks
that matures in June 2017
• Secured committed lines of credit with two unaffiliated banks, aggregating to $175 million with a
maturity date of June 2017
• Unsecured uncommitted lines of credit with two unaffiliated banks aggregating to $100 million, of which
$75 million is scheduled to mature in June 2017 and the remaining line has no maturity date
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• Secured uncommitted lines of credit with several unaffiliated banks aggregating to $375 million with no
maturity date
The revolving credit facility contains maintenance covenants related to E*TRADE Securities' minimum
consolidated tangible net worth and regulatory net capital ratio. There were no outstanding balances for
these lines at December 31, 2016.
NOTE 15—CORPORATE DEBT
Corporate debt at December 31, 2016 and 2015 is outlined in the following table (dollars in millions):
Face Value
Discount
Net
December 31, 2016
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, 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
5 3/8% Notes
$
$
$
$
540
460
1,000
3
1,003
$
(5) $
(4)
(9)
—
(9) $
540
460
1,000
8
$
(6) $
(5)
(11)
—
(11) $
$
1,008
$
535
456
991
3
994
534
455
989
8
997
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.
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, 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.
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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, 2016 and 2015, $5 million and $30 million of the Company’s
convertible debentures were converted into 0.5 million and 2.9 million shares of common stock,
respectively. At December 31, 2016, 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 168.0 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, 2016, there was no outstanding balance under the revolving credit facility and available
capacity for borrowings was $250 million. The credit facility expires in November 2017. The Company has
the ability to borrow against the credit facility for working capital and general corporate purposes. The credit
facility contains certain maintenance covenants, including the requirement for the parent company to
maintain unrestricted cash of $100 million. In September 2015, the Company entered into an amendment to
its senior secured revolving credit facility, which reduced or removed certain 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, 2016, 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, 2016 were as follows (dollars in millions):
Years ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total future principal payments of corporate debt
Unamortized discount
Total corporate debt
NOTE 16—INCOME TAXES
$
$
—
—
3
—
—
1,000
1,003
(9)
994
The components of income tax expense (benefit) for the years ended December 31, 2016, 2015 and 2014
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(1)
Income tax expense (benefit)
Year Ended December 31,
2016
2015
2014
$
— $
(5) $
3
2
5
285
(10)
—
275
6
(5)
5
(5)
(145)
(31)
—
(176)
4
$
286
$
(177) $
—
4
—
4
152
3
—
155
—
159
(1) Non-current income tax expense 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, 2016, 2015 and 2014 (dollars in millions):
Domestic
Foreign
Income before income tax expense (benefit)
Year Ended December 31,
2016
2015
2014
$
$
845
$
(7)
838
$
84
$
7
91
$
438
14
452
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Unrecognized Tax Benefits
The following table provides a reconciliation of the beginning and ending amount of unrecognized tax
benefits for the years ended December 31, 2016, 2015, and 2014 (dollars in millions):
Year Ended December 31,
2016
2015
2014
Unrecognized tax benefits, beginning of period
$
29
$
330
$
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
1
4
(3)
(1)
(2)
5
2
(304)
(3)
(1)
Unrecognized tax benefits, end of period
$
28
$
29
$
333
12
—
(14)
—
(1)
330
The unrecognized tax benefits decreased $1 million to $28 million during the year ended December 31,
2016. At December 31, 2016, the Company had $18 million, net of federal benefits, 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. 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
2010-2016
2014-2016
2013-2016
2008-2016
(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 $7
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 $10 million and $13 million as of
December 31, 2016 and 2015, respectively. Tax expense for the year ended December 31, 2016 included a
$3 million net benefit related to the reduction of interest and penalties, which was primarily due to state
settlements with tax authorities and the expiration of statutes of limitations.
Deferred Taxes and Valuation Allowances
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, 2016 and 2015 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
Total deferred tax liabilities
$
December 31,
2016
2015
$
676
335
160
43
55
14
26
1,309
(35)
1,274
(518)
(518)
782
482
158
44
44
10
28
1,548
(82)
1,466
(433)
(433)
Net deferred tax assets, net
$
756
$
1,033
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. At December 31, 2016, the
Company had $1.5 billion of gross federal net operating losses, which will begin to expire in approximately
11 years. The decrease in the net operating losses deferred tax asset was primarily driven by current year
earnings. At December 31, 2016, the Company had no valuation allowance against its federal deferred tax
assets.
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, which has generated substantial income for each of
the last 13 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 bank structure driven by various credit loss mitigation activities and
improving economic conditions that benefited our loan portfolio, and monetizing brokerage relationships by
investing stable, low-cost deposits primarily in agency mortgage-backed securities.
The Company's valuation allowance for deferred tax assets decreased $47 million to $35 million at
December 31, 2016. Effective January 1, 2016, the Company elected to treat its broker-dealers, E*TRADE
Securities and E*TRADE Clearing, as single member LLCs for tax purposes. The election to be treated as
single member LLCs and future taxable income projections at the combined broker-dealer will result in the
utilization of certain state deferred tax assets, primarily state NOLs, against which the Company had
recorded valuation allowances. Accordingly, the Company recognized a tax benefit of $25 million for the
year ended December 31, 2016.
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, 2016, the Company had gross foreign country net operating loss carryforwards of $74
million. 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. At December 31, 2016, the
Company had total foreign deferred tax assets, net of federal benefit, of approximately $18 million. In
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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, 2016.
• At December 31, 2016, the Company had gross state net operating loss carryforwards that expire
between 2017 and 2035 in several states of $3.1 billion, most of which are subject to change by
corresponding changes in apportionment. At December 31, 2016, the Company had total state deferred
tax assets, net of federal benefit, of approximately $138 million that related to the Company's state net
operating loss carryforwards and temporary differences with a valuation allowance of $18 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,
2016.
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, 2016, 2015 and 2014:
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 allowances
Tax credits
Estimated reserve for uncertain tax positions
Deferred tax adjustments
Tax on undistributed earnings and profits in certain foreign
subsidiaries
Settled IRS examination
Other
Effective tax rate
NOTE 17—SHAREHOLDERS' EQUITY
Year Ended December 31,
2016
2015
2014
35.0%
35.0 %
35.0%
3.9
0.2
(0.1)
0.2
(5.5)
(0.7)
0.1
1.3
—
—
(0.3)
34.1%
0.2
(2.4)
(0.5)
6.5
0.1
(3.8)
4.7
3.5
3.9
(241.5)
(0.4)
(194.7)%
2.0
(1.0)
(0.1)
0.6
2.2
(0.6)
(0.3)
(3.4)
1.1
—
(0.3)
35.2%
The activity in shareholders’ equity during the year ended December 31, 2016 is summarized in the
following table (dollars in millions):
Preferred
Stock
Common Stock /
Additional Paid-
In
Capital
Accumulated Deficit /
Other Comprehensive
Loss
Total
Beginning balance, December 31, 2015
$
— $
7,359
$
(1,560) $
5,799
Net income
Net change from available-for-sale
securities
Issuance of preferred stock
Repurchases of common stock
Other(1)
—
—
394
—
—
—
—
—
(452)
17
552
(38)
—
—
—
552
(38)
394
(452)
17
Ending balance, December 31, 2016
$
394
$
6,924
$
(1,046) $
6,272
(1) Other includes employee share-based compensation and conversions of convertible debentures.
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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, 2016, 2015 and 2014 (dollars in millions):
Available-for-
Sale
Securities(1)
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Total
Balance, December 31, 2015
Other comprehensive loss before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net change
Balance, December 31, 2016
$
$
(101) $
— $
2
$
(5)
(33)
(38)
—
—
—
(139) $
— $
—
—
—
2
$
(99)
(5)
(33)
(38)
(137)
(1)
Includes unamortized unrealized pretax losses of approximately $8 million at December 31, 2016, related to available-for-sale
securities that were transferred to held-to-maturity during the year ended December 31, 2016. See Note 7—Available-for-Sale
and Held-to-Maturity Securities for additional information.
Available-for-
Sale
Securities
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Total
Balance, December 31, 2014
Other comprehensive loss before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net change
Balance, December 31, 2015
$
$
7
$
(261) $
5
$
(249)
(84)
(24)
(108)
(10)
271
261
(3)
—
(3)
(101) $
— $
2
$
(97)
247
150
(99)
Available-for-
sale
Securities
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Total
Balance, December 31, 2013
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from accumulated
other comprehensive loss
Net change
Balance, December 31, 2014
$
$
(160) $
(298) $
5
$
(453)
193
(26)
167
(39)
76
37
7
$
(261) $
—
—
—
5
154
50
204
$
(249)
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The following tables present other comprehensive income (loss) activity and the related tax effect for the
years ended December 31, 2016, 2015 and 2014 (dollars in millions):
Year Ended December 31,
2016
Tax
Effect
Before
Tax
After
Tax
Before
Tax
2015
Tax
Effect
After
Tax
Before
Tax
2014
Tax
Effect
After
Tax
Other comprehensive income (loss)
Available-for-sale securities:
Unrealized gains (losses), net
$
(10) $
Reclassification into earnings, net
Net change from available-for-sale
securities
Cash flow hedging instruments:
Unrealized losses, net
Reclassification into earnings, net
Net change from cash flow hedging
instruments
Foreign currency translation losses, net
(53)
(63)
—
—
—
—
Other comprehensive income (loss)
$
(63) $
5
20
25
—
—
—
—
25
52
15
67
7
(168)
$
(5) $ (136) $
(33)
(39)
(38)
(175)
$ (84) $ 310
$ (117) $ 193
(24)
(42)
16
(26)
(108)
268
(101)
167
—
—
—
—
(17)
439
(10)
271
422
(161)
261
(3)
—
(3)
(68)
125
57
—
29
(49)
(20)
—
(39)
76
37
—
$ (38) $ 244
$ (94) $ 150
$ 325
$ (121) $ 204
The following table presents the consolidated statement of income line items impacted by reclassifications
out of accumulated other comprehensive loss for the years ended December 31, 2016, 2015 and 2014
(dollars in millions):
Accumulated Other
Comprehensive Loss
Components
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
Year Ended December 31,
2016
2015
2014
Available-for-sale securities:
Affected Line Items in the Consolidated
Statement of Income
Cash flow hedging
instruments:
$
$
$
53
$
39
$
42 Gains (losses) on securities and other, net
(20)
(15)
(16)
Income tax expense
33
$
24
$
26 Reclassification into earnings, net
— $
(370) $
— Gains (losses) on securities and other, net
—
—
—
(69)
(439)
168
(125)
Interest expense
(125) Reclassification into earnings, before tax
49
Income tax benefit
$
— $
(271) $
(76) Reclassification into earnings, net
For additional information on the $370 million reclassification during year ended December 31, 2015, see
Note 9—Derivative Instruments and Hedging Activities.
Issuance of Preferred Stock
On August 25, 2016, the Company issued 400,000 shares of Series A fixed-to-floating rate non-cumulative
perpetual preferred stock for gross proceeds of $400 million. Net proceeds, after issuance cost, were
approximately $394 million. The shares have a par value of $0.01 and a liquidation preference of $1,000
per share. Dividends are non-cumulative and, if declared, are payable semi-annually at a rate of 5.875%
from the original issue date to, but excluding, September 15, 2026. Dividends thereafter are payable at a
floating rate equal to the three-month U.S. dollar LIBOR on the related dividend determination date plus
4.435%. The Company used the proceeds of the issuance, along with existing corporate cash, to fund the
acquisition of OptionsHouse. See Note 2—Business Acquisition for additional information.
As no preferred stock dividends were declared during the year ended December 31, 2016, the Company
has not presented net income available to common shareholders on the consolidated statement of income.
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On February 2, 2017, the Board declared a dividend of $32.64 per share, or $13 million, to holders of record
of the Series A Preferred stock as of February 28, 2017. The dividend will be paid on March 15, 2017.
Share Repurchases
On November 19, 2015, the Company announced that its Board of Directors authorized the repurchase of
up to $800 million of shares of the Company's common stock through March 31, 2017. During the year
ended December 31, 2016, the Company repurchased a total of $452 million, or 19.0 million shares, of
common stock under this program which brings total repurchases to $502 million, or 20.6 million shares,
since inception. As of December 31, 2016, $298 million remained available for additional repurchases. The
Company accounts for share repurchases retired after repurchase by allocating the excess repurchase
price over par to additional paid-in-capital.
NOTE 18—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,
2016
2015
2014
$
$
$
552
$
268
$
293
277,789
290,762
288,705
1.99
$
0.92
$
1.02
552
$
268
$
293
Basic weighted-average shares outstanding (in thousands)
277,789
290,762
288,705
Effect of dilutive securities:
Weighted-average restricted stock and options issued to
employees (in thousands)
Weighted-average convertible debentures (in
thousands)
872
387
Diluted weighted-average shares outstanding (in thousands)
279,048
1,429
1,399
2,820
295,011
3,999
294,103
Diluted earnings per share
$
1.98
$
0.91
$
1.00
For the years ended December 31, 2016, 2015 and 2014, the Company excluded less than 0.1 million, 0.1
million and 0.5 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.
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NOTE 19—REGULATORY REQUIREMENTS
Broker-Dealer and FCM Capital Requirements
The Company’s U.S. broker-dealer subsidiaries are subject to the Uniform Net Capital 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. As FCMs, the
Company’s U.S. broker-dealer subsidiaries are also subject to CFTC net capital requirements, including the
maintenance of adjusted net capital equal to or in excess of the greater of (1) $1,000,000 (2) the FCM's
risk-based capital requirement, computed as 8% of the total risk margin requirements for all positions
carried in customer and non-customer accounts, (3) the amount of adjusted net capital required by the NFA
or (4) the amount of net capital required by the SEC's net capital rule. The Company’s international broker-
dealer subsidiary is subject to capital requirements determined by its respective regulator.
At December 31, 2016 and 2015, all of the Company’s broker-dealer subsidiaries met minimum net capital
requirements. The tables below summarize the minimum capital requirements and excess capital for the
Company’s broker-dealer subsidiaries at December 31, 2016 and 2015 (dollars in millions):
December 31, 2016:
E*TRADE Securities(1)(2)
OptionsHouse(3)
Other broker-dealer
Total
December 31, 2015:
E*TRADE Clearing(2)
E*TRADE Securities(1)
Other broker-dealers
Total
Required Net
Capital
Net Capital
Excess Net
Capital
$
$
$
$
158
$
969
$
1
—
22
21
159
$
1,012
$
161
$
1,007
$
—
1
49
15
162
$
1,071
$
811
21
21
853
846
49
14
909
(1) Elected to use the Alternative method to compute required net capital. E*TRADE Securities' minimum net capital requirement
was $250,000 as of December 31, 2015.
(2) Effective October 1, 2016, E*TRADE Clearing was merged into E*TRADE Securities. E*TRADE Securities paid dividends of
$208 million to the parent company during the year ended December 31, 2016 and $70 million in January 2017. E*TRADE
Clearing paid dividends of $227 million to the parent company during the year ended December 31, 2016.
(3) The Company completed the acquisition of OptionsHouse on September 12, 2016. OptionsHouse elected to use the Aggregate
Indebtedness method to compute net capital; however, as OptionsHouse is an FCM, the prescribed fixed-dollar minimum
capital requirement is $1 million.
Bank Capital Requirements
E*TRADE Financial and E*TRADE Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Beginning January 1, 2015, both E*TRADE Financial and
E*TRADE Bank calculate regulatory capital under the Basel III framework using the Standardized
Approach, subject to transition provisions. Failure to meet minimum capital requirements can trigger certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on E*TRADE Financial’s and E*TRADE Bank’s financial condition and results of
operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,
E*TRADE Financial and E*TRADE Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting
practices. In addition, E*TRADE Bank may not pay dividends to the parent company without the non-
objection, or in certain cases the approval, of its regulators, and any loans by E*TRADE Bank to the parent
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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 Tier 1 leverage, common equity Tier 1 capital, Tier 1 risk-based
capital and total risk-based capital ratios. Events beyond management's control, such as deterioration in
credit markets, could adversely affect future earnings and E*TRADE Financial’s and E*TRADE Bank’s
ability to meet future capital requirements. E*TRADE Financial and E*TRADE Bank were categorized as
"well capitalized" under the regulatory framework for prompt corrective action for the periods presented in
the table below (dollars in millions):
December 31, 2016
December 31, 2015
Actual
Well Capitalized
Minimum Capital
Excess
Capital
Actual
Well Capitalized
Minimum Capital
Excess
Capital
Amount
Ratio
Amount
Ratio
Amount Amount
Ratio
Amount
Ratio
Amount
E*TRADE Financial(1)
Tier 1 leverage
$ 3,610
7.8% $ 2,316
5.0% $ 1,294
$ 3,747
9.0% $ 2,093
5.0% $ 1,654
Common equity
Tier 1 capital
Tier 1 risk-based
capital
Total risk-based
capital
$ 3,483
37.0% $
612
6.5% $ 2,871
$ 3,747
39.3% $
620
6.5% $ 3,127
$ 3,610
38.3% $
754
8.0% $ 2,856
$ 3,747
39.3% $
763
8.0% $ 2,984
$ 4,148
44.0% $
942
10.0% $ 3,206
$ 4,186
43.9% $
954
10.0% $ 3,232
December 31, 2016
December 31, 2015
Actual
Well Capitalized
Minimum Capital
Excess
Capital
Actual
Well Capitalized
Minimum Capital
Excess
Capital
Amount
Ratio
Amount
Ratio
Amount Amount
Ratio
Amount
Ratio
Amount
E*TRADE Bank(1)(2)
Tier 1 leverage
$ 3,132
8.8% $ 1,786
5.0% $ 1,346
$ 3,075
9.7% $ 1,579
5.0% $ 1,496
Common equity
Tier 1 capital
Tier 1 risk-based
capital
Total risk-based
capital
$ 3,132
38.3% $
532
6.5% $ 2,600
$ 3,075
36.5% $
548
6.5% $ 2,527
$ 3,132
38.3% $
655
8.0% $ 2,477
$ 3,075
36.5% $
674
8.0% $ 2,401
$ 3,237
39.5% $
819
10.0% $ 2,418
$ 3,185
37.8% $
842
10.0% $ 2,343
(1) The Basel III final rule introduces a capital conservation buffer that limits a banking organization’s ability to make capital
distributions and discretionary bonus payments to executive officers if a banking organization fails to maintain a Common
Equity Tier 1 capital conservation buffer of more than 2.5%, on a fully phased-in basis, of total risk-weighted assets above each
of the following minimum risk-based capital ratio requirements: Common Equity Tier 1 capital (4.5%), Tier 1 (6.0%), and total
risk-based capital (8.0%). This requirement was effective beginning on January 1, 2016, and will be fully phased-in by 2019.
Certain new regulatory deductions and adjustments are subject to a phase-in period over a four year period, beginning at 40%
in 2015 and fully implemented at 100% in 2018.
(2) E*TRADE Bank paid dividends of $423 million to the parent company during the year ended December 31, 2016.
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NOTE 20—LEASE ARRANGEMENTS
The Company has non-cancelable operating leases for facilities through 2028. Future minimum lease
payments and sublease proceeds under these leases with initial or remaining terms in excess of one year,
including leases associated with restructuring activities, are as follows (dollars in millions):
Years ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total future minimum lease payments
Sublease proceeds
Net lease commitments
Operating Lease
Commitments
$
$
$
26
27
24
18
17
26
138
(2)
136
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 $24 million, $22 million and $21
million for the years ended December 31, 2016, 2015 and 2014, respectively. Rent expense, which is
recorded in the occupancy and equipment line item in the consolidated statement of income, excludes costs
related to leases associated with restructuring activities, which are recorded in the restructuring and
acquisition-related 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. As the transaction did not qualify for leaseback accounting, future minimum lease
payments on the lease are not included above. See Note 10—Property and Equipment, Net for more
information.
NOTE 21—COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY
MATTERS
Legal Matters
The Company reviews its lawsuits, regulatory inquiries and other legal proceedings on an ongoing basis
and provides disclosure and records loss contingencies in accordance with the loss contingencies
accounting guidance. The Company establishes an accrual for losses at management's best estimate when
it assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably
estimated. The Company monitors these matters for developments that would affect the likelihood of a loss
and the accrued amount, if any, and adjusts the amount as appropriate.
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
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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. Briefing of this appeal is expected to conclude in August 2017. The
Company will continue to defend itself vigorously.
On May 16, 2011, Droplets Inc., the holder of two patents pertaining to user interface servers, filed a
complaint in the U.S. District Court for the Eastern District of Texas against E*TRADE Financial
Corporation, E*TRADE Securities, E*TRADE Bank and multiple other unaffiliated financial services firms.
Plaintiff contends that the defendants engaged in patent infringement under federal law. Plaintiff seeks
unspecified damages and an injunction against future infringements, plus royalties, costs, interest and
attorneys’ fees. On March 28, 2012, a change of venue was granted and the case was transferred to the
United States District Court for the Southern District of New York. The Company's motion for summary
judgment on the grounds of non-infringement was granted by the U.S. District Court in a Decision and
Order dated March 9, 2015. All remaining claims are stayed pending resolution of issues on Droplet's
remaining patents under review by the Patent Trial and Appeal Board (PTAB). On July 6, 2015, the PTAB
instituted an inter partes review of plaintiff's '115 patent. A hearing on the inter partes review was conducted
on March 14, 2016. On June 23, 2016, the PTAB deemed Droplets’ putative '115 patent to be
“unpatentable.” In a separate proceeding, the PTAB has also separately deemed Droplets’ putative '838
patent to be “unpatentable.” Droplets has appealed to the Circuit Court of Appeals for the District of
Columbia. The opening brief was filed on December 23, 2016 and briefing is expected to continue into April
2017. The Company will continue to defend itself vigorously in this matter.
Several cases have been filed nationwide involving the April 2007 leveraged buyout (LBO) of the Tribune
Company (Tribune) by Sam Zell, and the subsequent bankruptcy of Tribune. In William Niese et al. v. A.G.
Edwards et al., in Superior Court of Delaware, New Castle County, former Tribune employees and retirees
claimed that Tribune was actually insolvent at the time of the LBO and that the LBO constituted a fraudulent
transaction that depleted the plaintiffs’ retirement plans, rendering them worthless. E*TRADE Clearing,
along with numerous other financial institutions, is a named defendant in this case. One of the defendants
removed the action to federal district court in Delaware on July 1, 2011. In Deutsche Bank Trust Company
Americas et al. v. Adaly Opportunity Fund et al., filed in the Supreme Court of New York, New York County
on June 3, 2011, the Trustees of certain notes issued by Tribune allege wrongdoing in connection with the
LBO. In particular the Trustees claim that the LBO constituted a constructive fraudulent transfer under
various state laws. G1 Execution Services, LLC (formerly known as E*TRADE Capital Markets, LLC), along
with numerous other financial institutions, is a named defendant in this case. In Deutsche Bank et al. v.
Ohlson et al., filed in the U.S. District Court for the Northern District of Illinois, noteholders of Tribune
asserted claims of constructive fraud and G1 Execution Services, LLC is a named defendant in this case.
Under the agreement governing the sale of G1 Execution Services, LLC to Susquehanna International
Group, LLP, the Company remains responsible for any resulting actions taken against G1 Execution
Services, LLC as a result of such investigation. In EGI-TRB LLC et al. v. ABN-AMRO et al., filed in the
Circuit Court of Cook County Illinois, creditors of Tribune assert fraudulent conveyance claims against
multiple shareholder defendants and E*TRADE Clearing is a named defendant in this case. These cases
have been consolidated into a multi-district litigation. The Company’s time to answer or otherwise respond
to the complaints has been stayed pending further orders of the Court. On September 18, 2013, the Court
entered the Fifth Amended Complaint. On September 23, 2013, the Court granted the defendants’ motion to
dismiss the individual creditors’ complaint. The individual creditors filed a notice of appeal. The steering
committees for plaintiffs and defendants have submitted a joint plan for the next phase of litigation. The next
phase of the action will involve individual motions to dismiss. On April 22, 2014, the Court issued its
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protocols for dismissal motions for those defendants who were "mere conduits" who facilitated the
transactions at issue. The motion to dismiss Count I of the Fifth Amended Complaint for failure to state a
cause of action was fully briefed on July 2, 2014, and the parties await decision on that motion. The
Litigation Trustee for the Plaintiffs dismissed all claims against E*TRADE Clearing pursuant to a Stipulation
confirmed by the Court on June 7, 2016. All remaining claims involving E*TRADE S&P 500 Fund have been
dismissed by order dated January 6, 2017. The order will become final unless the litigation Trustee appeals.
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 2017. 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. On July 23, 2016, a putative
class action was filed in the U.S. District Court for the Southern District of New York by Craig L. Schwab, on
behalf of himself and others similarly situated, naming E*TRADE Financial Corporation, E*TRADE
Securities LLC, and former Company executives as defendants. The complaint alleges that E*TRADE
violated federal securities laws in connection with the routing of its customers’ orders to various market-
makers and exchanges. Plaintiff seeks unspecified damages, declaratory relief, restitution, disgorgement of
payments received by the Company, and attorneys’ fees. By stipulation, the Rayner case has been
consolidated with the Schwab case and both matters are now venued in the Southern District of New York.
E*TRADE has moved to dismiss the complaint in Rayner. E*TRADE moved to dismiss the Schwab case on
January 11, 2017; and in response, the Schwab plaintiffs submitted an amended Complaint on February 10,
2017. The amended Schwab complaint asserts only two claims: violation of Section 10(b) of the Exchange
Act by E*TRADE Securities LLC and E*TRADE Financial Corporation; and violation of Section 20(a) of the
Exchange Act by E*TRADE's two most recent chief executive officers. The Company will continue to defend
itself vigorously in these matters.
In addition to the matters described above, the Company is subject to various legal proceedings and claims
that arise in the normal course of business. In each pending matter, the Company contests liability or the
amount of claimed damages. In view of the inherent difficulty of predicting the outcome of such matters,
particularly in cases where claimants seek substantial or indeterminate damages, or where investigation or
discovery have yet to be completed, the Company is unable to estimate a range of reasonably possible
losses on its remaining outstanding legal proceedings; however, the Company believes any losses, both
individually or in the aggregate, would not be reasonably likely to have a material adverse effect on the
consolidated financial condition or results of operations of the Company.
An unfavorable outcome in any matter could have a material adverse effect on the Company’s business,
financial condition, results of operations or cash flows. In addition, even if the ultimate outcomes are
resolved in the Company’s favor, the defense of such litigation could entail considerable cost or the
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diversion of the efforts of management, either of which could have a material adverse effect on the
Company’s business, financial condition, results of operations or cash flows.
Regulatory Matters
The securities, futures, foreign currency and banking industries are subject to extensive regulation under
federal, state and applicable international laws. From time to time, the Company has been threatened with
or named as a defendant in lawsuits, arbitrations and administrative claims involving securities, banking and
other matters. The Company is also subject to periodic regulatory examinations and inspections.
Compliance and trading problems that are reported to regulators, such as the SEC, Federal Reserve Bank
of Richmond, FINRA, CFTC, NFA or OCC by dissatisfied customers or others are investigated by such
regulators, and may, if pursued, result in formal claims being filed against the Company by customers or
disciplinary action being taken against the Company or its employees by regulators. Any such claims or
disciplinary actions that are decided against the Company could have a material impact on the financial
results of the Company or any of its subsidiaries.
During 2012, the Company completed a review of order handling practices and pricing for order flow
between E*TRADE Securities and G1 Execution Services, LLC. The Company implemented changes to its
practices and procedures that were recommended during the review. Banking regulators and federal
securities regulators were regularly updated during the course of the review. Subsequently, on July 11,
2013, FINRA notified E*TRADE Securities and G1 Execution Services, LLC that it was conducting an
examination of both firms’ order handling practices. On March 19, 2015, the Company received a Wells
notice from FINRA's Market Regulation Department relating to the adequacy of E*TRADE Securities' order-
routing disclosures and supervisory process for reviewing execution quality during the period covered by
the Company's 2012 internal review (July 2011 - June 2012). The Company cooperated fully with FINRA in
the examination. In June 2016, E*TRADE Securities entered into a settlement with FINRA whereby it
agreed to a censure and paid a $900,000 fine.
Insurance
The Company maintains insurance coverage that management believes is reasonable and prudent. The
principal insurance coverage it maintains covers commercial general liability; property damage; hardware/
software damage; cyber liability; directors and officers; employment practices liability; certain criminal acts
against the Company; and errors and omissions. The Company believes that such insurance coverage is
adequate for the purpose of its business. The Company’s ability to maintain this level of insurance coverage
in the future, however, is subject to the availability of affordable insurance in the marketplace.
Commitments
In the normal course of business, the Company makes various commitments to extend credit and incur
contingent liabilities that are not reflected in the consolidated balance sheet. Significant changes in the
economy or interest rates may influence the impact that these commitments and contingencies have on the
Company in the future.
The Company’s equity method, cost method and other investments are generally limited liability
investments in partnerships, companies and other similar entities, including tax credit partnerships and
community development entities, which are not required to be consolidated. The Company had $83 million
in unfunded commitments with respect to these investments at December 31, 2016.
At December 31, 2016, the Company had approximately $23 million of certificates of deposit scheduled to
mature in less than one year and approximately $18 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
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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, 2016, management estimated that the maximum potential liability under this
arrangement, including the current carrying value of the trusts, was equal to approximately $418 million or
the total face value of these securities plus accrued interest payable, which may be unpaid at the
termination of the trust arrangement.
NOTE 22—CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following presents the parent company’s condensed statement of comprehensive income, balance
sheet and statement of cash flows:
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
(In millions)
Dividends from subsidiaries(1)
Other revenues
Total net revenue
Total non-interest expense
Income before income tax expense (benefit) and equity in income (loss) of
consolidated subsidiaries
Income tax expense (benefit)
Equity in undistributed income (loss) of subsidiaries
Net income
Other comprehensive (loss) income
Comprehensive income
Year Ended December 31,
2016
2015
2014
$
$
858
328
1,186
501
685
456
323
552
(38)
$
514
$
859
317
1,176
560
616
(287)
(635)
268
150
418
$
$
311
226
537
480
57
(88)
148
293
204
497
(1) Includes $423 million, $281 million and $300 million from E*TRADE Bank for the years ended 2016, 2015 and 2014,
respectively.
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CONDENSED BALANCE SHEET
(In millions)
ASSETS
Cash and equivalents
Property and equipment, net
Investment in consolidated subsidiaries(1)
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,
2016
2015
$
416
148
6,523
38
179
153
432
156
5,434
57
739
173
7,457
$
6,991
$
994
191
1,185
6,272
7,457
$
997
195
1,192
5,799
6,991
$
$
$
$
(1) Includes investment of $3,153 million and $3,181 million in E*TRADE Bank as of December 31, 2016 and 2015, respectively.
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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
Issuance of preferred stock
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
$
Parent Company Guarantees
Year Ended December 31,
2016
2015
2014
$
552
$
268
$
293
48
(323)
—
564
841
(36)
—
(766)
16
(786)
—
—
400
(452)
(19)
(71)
(16)
432
416
$
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
Guarantees are contingent commitments issued by the parent for the purpose of guaranteeing the financial
obligations of a subsidiary to a third party. The financial obligations of the parent and the relevant subsidiary
do not change by the existence of a parent 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 parent company.
The parent 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 third party may
seek payment from the Company. Terms are undefined, and are governed by the terms of the underlying
financial obligation. At December 31, 2016, no claims had been made against the parent for payment under
these guarantees and thus, no obligations have been recorded. None of these guarantees are
collateralized.
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NOTE 23—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):
2016
2015
First
Second
Third
Fourth
First
Second
Third
Fourth
Total net revenue
Net income (loss)
Earnings (loss)
per share:
Basic
Diluted
$
$
$
$
472
153
0.54
0.53
$
$
$
$
474
133
0.48
0.48
$
$
$
$
486
139
0.51
0.51
$
$
$
$
509
127
0.46
0.46
$
$
$
$
441
40
0.14
0.14
$
$
$
$
429
292
1.01
0.99
$
$
$
$
61
$
(153) $
439
89
(0.53) $
(0.53) $
0.31
0.30
Net income in the first, second, third and fourth quarters of 2016 includes a pre-tax benefit to provision for
loan losses of $34 million, $35 million, $62 million and $18 million, respectively.
Net income in the first quarter of 2015 includes a $73 million pre-tax loss on early extinguishment of debt
related to the redemption of corporate debt. Net income in the second quarter of 2015 includes a $220
million income tax benefit resulting from the settlement of an IRS examination. Net income and revenue in
the third quarter of 2015 were impacted by the reclassification from accumulated comprehensive loss of
$370 million of losses related to cash flow hedges as a result of the termination of legacy wholesale funding
obligations and net income was further impacted by a $39 million pre-tax loss on early extinguishment of
debt, primarily related to the termination of the wholesale funding obligations. See Note 14—Other
Borrowings, and Note 15—Corporate Debt for additional information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Based on an evaluation under the supervision and with the participation of our management, our Chief
Executive Officer and our Chief Financial Officer have concluded that the Company's disclosure
controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act), 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.
(b) 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.
(c) There were no changes in the Company’s internal control over financial reporting during the quarter
ended December 31, 2016, 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.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The information required by this item is incorporated by reference from the Company’s definitive proxy
statement for its 2017 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A
within 120 days after December 31, 2016 (the Proxy Statement).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the Proxy Statement.
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PART IV
ITEM 15. EXHIBITS
(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
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
Description
Amended and Restated Certificate of Incorporation of E*TRADE Financial Corporation
(incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed on August 4,
2010).
Certificate of Amendment of the Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
on May 11, 2012).
Certificate of Designations of Preferences and Rights of the Fixed-to-Floating Rate Non-
Cumulative Perpetual Preferred Stock, Series A of E*TRADE Financial Corporation
(incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
on August 25, 2016).
Amended and Restated Bylaws of E*TRADE Financial Corporation (incorporated by
reference to Exhibit 3.2 of the Company’s Form 10-Q filed on November 3, 2016).
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 the Company 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, to the Indenture dated August 25, 2009,
among the Company, the guaranteeing subsidiaries party thereto and The Bank of New York
Mellon Trust Company, N.A., 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).
Second Supplemental Indenture dated November 17, 2014, to the Senior Indenture dated
November 14, 2012, 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 March 5, 2015, to the Senior Indenture dated
November 14, 2012, between the Company 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).
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Exhibit
Number
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
+10.12
Description
Certificate of Designations of Preferences and Rights of the Fixed-to-Floating Rate Non-
Cumulative Perpetual Preferred Stock, Series A of E*TRADE Financial Corporation
(incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed
on August 25, 2016).
Form of Certificate Evidencing Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred
Stock, Series A of E*TRADE Financial Corporation (incorporated by reference to Exhibit 4.2
of the Company’s Current Report on Form 8-K filed on August 25, 2016).
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).
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 on 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 on August 5, 2015).
364-Day Credit Agreement, dated as of June 24, 2016, among E*TRADE Clearing LLC, the
Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, U.S. Bank
National Association, Industrial and Commercial Bank of China Limited, New York Branch,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Bank, National
Association, as Syndication Agents, and J.P. Morgan Securities LLC, U.S. Bank National
Association, Industrial and Commercial Bank of China Limited, New York Branch, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Bank, National Association, as
Joint Bookrunners and Joint Lead Arrangers (incorporated by reference to Exhibit 10.1 of
the Company’s Form 10-Q filed on August 4, 2016).
Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 of the
Company’s Form 10-K filed on February 24, 2010).
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 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 Form 10-K filed on February 24,
2015).
Form of Performance Share Unit Award Agreement for 2015 Equity Incentive Plan
(incorporated by reference to Exhibit 10.8 of the Company’s Form 10-K filed on February 24,
2016).
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Exhibit
Number
+10.13
10.14
10.15
*+10.16
+10.17
+10.18
+10.19
Description
Form of Restricted Stock Agreement for Non-Employee Directors under the 2015 Equity
Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed
on May 4, 2016).
Form of Deferred Restricted Stock Unit Agreement for Non-Employee Directors under the
2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 of the Company’s
Form 10-Q filed on May 4, 2016).
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 the Company and each of Michael J. Curcio,
Michael A. Pizzi and Michael E. Foley.
Employment Agreement dated October 21, 2015 by and between the Company and Paul T.
Idzik (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed on
November 4, 2015).
Employment Agreement dated September 12, 2016 between the Company and Rodger A.
Lawson (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed on
November 3, 2016).
Employment Agreement dated September 12, 2016 between the Company and Karl A.
Roessner (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q filed on
November 3, 2016).
*+10.20
2017 Addendum, dated February 16, 2017, to the Employment Agreement dated September
12, 2016 between the Company and Karl A. Roessner
*12.1
*21.1
*23.1
*31.1
*31.2
*32.1
Statement of Ratio of Earnings to Fixed Charges.
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*101.INS
XBRL Instance Document
*101.SCH
XBRL Taxonomy Extension Schema Document
*101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
*101.LAB
XBRL Taxonomy Extension Label Linkbase Document
*101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
+ 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.
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ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
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.
Dated: February 22, 2017
E*TRADE Financial Corporation
(Registrant)
By
/S/ KARL A. ROESSNER
Karl A. Roessner
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)
E*TRADE | 2016 10-K
158
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/ KARL. A ROESSNER
Karl A. Roessner
Director and Chief
Executive Officer
(Principal Executive Officer)
February 22, 2017
/S/ MICHAEL A. PIZZI
Chief Financial Officer (Principal
February 22, 2017
Michael A. Pizzi
Financial Officer)
/S/ BRENT B. SIMONICH
Brent B. Simonich
Corporate Controller (Principal
Accounting Officer)
February 22, 2017
/S/ RODGER A. LAWSON
Rodger A. Lawson
Executive Chairman of the Board
February 22, 2017
/S/ RICHARD J. CARBONE
Richard J. Carbone
Director
February 22, 2017
/S/ JAMES P. HEALY
James P. Healy
/S/ KEVIN T. KABAT
Kevin T. Kabat
Director
February 22, 2017
Director
February 22, 2017
/S/ FREDERICK W. KANNER
Frederick W. Kanner
Director
February 22, 2017
/S/ JAMES LAM
James Lam
Director
February 22, 2017
/S/ SHELLEY B. LEIBOWITZ
Shelley B. Leibowitz
Director
/S/ REBECCA SAEGER
Rebecca Saeger
Director
/S/ JOSEPH L. SCLAFANI
Joseph L. Sclafani
Director
February 22, 2017
February 22, 2017
February 22, 2017
/S/ GARY H. STERN
Gary H. Stern
Director
February 22, 2017
/S/ DONNA L. WEAVER
Donna L. Weaver
Director
February 22, 2017
E*TRADE | 2016 10-K
159