10-K 1 etfc-20151231x10k.htm 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-K
_____________________________
(Mark One)
x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number 1-11921
 ____________________________
E*TRADE Financial Corporation
(Exact Name of Registrant as Specified in its Charter)
____________________________
Delaware
 
94-2844166
(State or other jurisdiction
of incorporation or organization)
 
(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 x   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  x
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 x   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  x    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.    x
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   x
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 x
At June 30, 2015, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $6.1 billion (based upon the closing price per share of the registrant's common stock as reported by the NASDAQ Global Select Market on that date). Shares of common stock held by each officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliates' status is not necessarily a conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of February 19, 2016, there were 282,708,675 shares of common stock outstanding.
Documents Incorporated by Reference: Certain portions of the definitive Proxy Statement related to the Company’s 2016 Annual Meeting of Stockholders, to be filed hereafter (incorporated into Part III hereof). 



E*TRADE FINANCIAL CORPORATION
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 2015
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.
 
 
 
 
 
 
 
 
 
 
 

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Item 9.
Item 9A.
Item 9B.
PART III
PART IV
Item 15.
 

Unless otherwise indicated, references to "the Company," "we," "us," "our" and "E*TRADE" mean E*TRADE Financial Corporation and its subsidiaries, and references to the parent company mean E*TRADE Financial Corporation but not its subsidiaries.
E*TRADE, E*TRADE Financial, E*TRADE Bank, Equity Edge and the Converging Arrows logo are registered trademarks of E*TRADE Financial Corporation in the United States and in other countries.

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PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. These statements discuss, among other things, our future plans, objectives, outlook, strategies, expectations and intentions relating to our business and future financial and operating results and the assumptions that underlie these matters and include any statement that is not historical in nature. These statements may be identified by the use of words such as "assume," "expect," "believe," "may," "will," "should," "anticipate," "intend," "plan," "estimate," "continue" and similar expressions. We caution that actual results could differ materially from those discussed in these forward-looking statements. Important factors that could contribute to our actual results differing materially from any forward-looking statements include, but are not limited to, those discussed under Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Part I. Item 1A. Risk Factors of this Form 10-K; and elsewhere in this report and in other reports we file with the Securities and Exchange Commission ("SEC"). By their nature forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Actual future results may vary materially from expectations expressed or implied in this report or any of our prior communications. The forward-looking statements contained in this report reflect our expectations only as of the date of this report. You should not place undue reliance on forward-looking statements, as we do not undertake to update or revise forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made, except as required by law.

ITEM 1.
BUSINESS
OVERVIEW
We are a financial services company that provides brokerage and related products and services primarily to individual retail investors under the brand "E*TRADE Financial." Our competitive strategy is to attract and retain customers by emphasizing a hybrid model for investing, trading and saving for retirement that leads with best-in-class digital channels, backed by professional support and guidance. We also provide investor-focused banking products, primarily sweep deposits, to retail investors.
Our corporate offices are located at 1271 Avenue of the Americas, 14th Floor, New York, New York 10020. We were incorporated in California in 1982 and reincorporated in Delaware in July 1996. We had approximately 3,400 employees at December 31, 2015. We operate directly and through numerous subsidiaries, many of which are overseen by governmental and self-regulatory organizations. Our most significant subsidiaries are described below:
E*TRADE Securities LLC ("E*TRADE Securities") is a registered broker-dealer and is the primary provider of brokerage products and services to our customers;
E*TRADE Clearing LLC ("E*TRADE Clearing") is the clearing firm for our brokerage subsidiaries and its main purpose is to clear and settle securities transactions for customers of E*TRADE Securities;
E*TRADE Bank is a federally chartered savings bank utilized by E*TRADE's broker-dealers to maximize the value of customer deposits. It provides our customers with Federal Deposit Insurance Corporation ("FDIC") insurance on a certain amount of customer deposits and provides other banking products to our customers; and
E*TRADE Financial Corporate Services is a provider of software and services for managing equity compensation plans to our corporate clients.
A complete list of our subsidiaries at December 31, 2015 can be found in Exhibit 21.1.
Our hybrid service delivery model is delivered through the following digital platforms:
E*TRADE.com is our award-winning site that provides customers with tools, guidance, actionable ideas, research and education to take control of their finances;
E*TRADE Mobile offers powerful trading applications for all popular smartphones and tablets, coupled with groundbreaking experiences like the Apple Watch® app - delivering the functionality investors and traders need while on the go; and

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E*TRADE Pro is our advanced trading platform for active and elite traders, with sophisticated tools and customizable layouts.
These digital platforms are complemented by our offline channels, which include our network of customer service representatives and financial consultants and our 24/7 customer service available via phone, email and online at our two national branches and in person through our 30 regional branches. Information on our website is not a part of this report.
STRATEGY
Our business strategy is centered on two core objectives: accelerating the growth of our core brokerage business to drive organic growth and improve market share, and generating robust earnings growth and healthy returns on capital to deliver long-term value for our stockholders.
Accelerate Growth of Core Brokerage Business
Enhance digital and offline customer experience
We are focused on delivering innovative solutions for trading, margin lending and cash management, while expanding our customer share of wallet in retirement, investing and savings. Through these offerings, we aim to continue acquiring new customers while deepening engagement with both new and existing customers.
Capitalize on value of corporate services business
Our corporate services business is a strategically important driver of brokerage account and asset growth for us. We leverage our industry-leading position to improve client acquisition, and bolstering awareness among U.S. plan participants of our full suite of offerings.
Generate Robust Earnings Growth and Healthy Returns on Capital
Maximize value of customer deposits while improving balance sheet efficiency
Our brokerage business generates a significant amount of stable, low-cost deposits, which we monetize through E*TRADE Bank by investing primarily in low-risk, agency mortgage-backed securities. We also continue to manage down the size and risks associated with our legacy loan portfolio, while mitigating credit losses where possible.
Create capital efficiency
Our capital plan was laid out in 2012 with a key goal of distributing capital from E*TRADE Bank to the parent company, to reduce corporate debt, which we completed in March 2015. As we continue to deliver on our capital plan initiatives, we are focused on deploying excess capital generated through earnings and lower capital requirements at E*TRADE Bank.
TECHNOLOGY
Delivering a compelling digital experience to our customers is a core pillar of our business strategy. We believe our focus on being a digital leader in the financial services industry is a competitive advantage. Following significant investments to strengthen our foundations in 2013 and 2014, we made a number of meaningful enhancements to our digital storefront and core platforms in 2015 that provide our customers an engaging, more intuitive experience. Significant updates in 2015 include:

new features for our website including a new welcome page on our website for prospective customers, an updated account overview page, a new retirement center and a new tax center;
new features for our leading mobile applications including conditional orders, multi-leg options orders, mutual fund trading, and several new technologies available via Apple® products including our Apple Watch® app; and
upgrades to E*TRADE Pro, including a new options analyzer tool, new margin analyzer tool, and a new user orientation module with customized predefined layouts.


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PRODUCTS AND SERVICES
We assess the performance of our business based on our two core segments: trading and investing and balance sheet management. Trading and investing focuses on: 1) Trading, Margin and Cash Management; 2) Retirement, Investing and Saving; and 3) Corporate Services. The factors used to judge our performance include profitability, customer activity and financial metrics, along with the competitiveness of our overall value proposition to the customer and our customers' engagement with E*TRADE. We assess the performance of our balance sheet management segment using metrics such as regulatory capital ratios, loan delinquencies, allowance for loan losses, enterprise net interest spread and average enterprise interest-earning assets. Costs associated with certain functions that are centrally-managed are separately reported in a corporate/other category.
Trading and Investing
Our trading and investing segment offers a comprehensive suite of financial products and services to individual retail investors. The most significant of these products and services are described below:
Trading, Margin and Cash Management
Trading, Margin and Cash Management delivers automated order placement and execution, empowering traders throughout the entire life cycle of a trade. We offer our customers a full range of investment vehicles including U.S. equities, American depositary receipts ("ADRs"), bonds, futures, options, exchange-traded funds ("ETFs"), including over 115 commission-free ETFs from leading independent providers, and over 7,500 non-proprietary mutual funds. Our tools cater to novice to professional-grade investors, delivering fundamental and technical research resources.
Our trading tools and vehicles are supported by guidance when customers need it, including fixed income and derivative specialists available on-call to guide customers, independent research and analytics, live and on-demand education resources, strategies and trading ideas and comprehensive screeners for all major asset classes.
Cash management includes FDIC insured deposit accounts, including checking, savings and money market accounts. These are fully integrated into customer brokerage accounts, delivering real-time transfers between E*TRADE accounts, free debit cards and unlimited ATM fee refunds, free online and mobile bill pay, mobile check deposits, and Apple Pay.
Margin accounts are also available to qualified customers, enabling them to borrow against their securities. We provide these customers with robust margin tools including a margin calculator, requirement lookup and margin analyzer tools to help customers strategize, plan and execute margin trades more efficiently and effectively.
Retirement, Investing and Saving
Retirement, Investing and Saving is dedicated to expanding our customer share of wallet by helping investors take control of and understand the steps to achieve their desired financial goals. We offer the following account types and services:
Individual Retirement Accounts ("IRAs") with no annual fees and no minimums, along with specialists to guide customers through the rollover process;
Managed Investment Portfolio advisory services from an affiliated registered investment advisor, with an investment of $25,000 or more, which provides one-on-one professional portfolio management; and
Unified Managed Account advisory services from an affiliated registered investment advisor, with an investment of $250,000 or more, which provides customers the opportunity to work with a dedicated investment professional to obtain a comprehensive, integrated approach to asset allocation, investments, and portfolio rebalancing.
We also offer a full breadth of digital tools to help investors take control:
OneStop Rollover, a simplified, online rollover program that enables investors to invest their 401(k) savings from a previous employer into a portfolio managed by the customer or an investment professional;

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Online Portfolio Advisor, helping customers identify asset allocations and providing a range of solutions including a one-time investment portfolio or a managed investment account;
Retirement Center, offering interactive tools, account selection assistance and to-do lists;
Investing Insights, delivering idea generation, topical ideas and actionable strategies;
Bond Resource Center, offering tools to help customers research, evaluate and choose bonds;
TipRanks, helping customers make sense of sellside ratings and social chatter through success metrics and aggregated sentiment; and
life-stage planning resources, helping investors plan for all phases of the retirement process.
Education and guidance also play a large role as we deliver a wide variety of educational formats, including traditional in-person events and digital content on our platforms. We also offer guidance from our financial consultants and Chartered Retirement Planning CounselorsSM at our 30 regional branches across the country, or through our two national branches via phone and email to receive complementary portfolio reviews and personalized investment recommendations.
Corporate Services
The corporate services business is an important driver of brokerage account and asset growth, with more than 1.4 million individual stock plan accounts across approximately 1,000 corporate clients that represent approximately 20% of S&P 500 companies. This business serves as an important introductory channel to E*TRADE, with our goal of converting the stock plan participants of our corporate clients into retail brokerage customers by providing best-in-class user experience and technology along with exceptional support and service. We offer the following software and services for managing equity compensation plans for corporate customers through the Equity Edge Online platform:
management of employee stock option plans, employee stock purchase plans and restricted stock plans with fully-automated administration, as well as accounting, reporting and scenario modeling tools;
integrated stock plan solutions including multi-currency settlement and delivery, disbursement in 33 countries, streamlined tax calculations and country code compatibility;
stock plan and investing education, restricted stock sales support, custom 10b5-1 plan design and implementation, SEC filing assistance; and
dedicated stock plan service representatives with live support in six languages in addition to phone-based translation in 140 languages.
Equity Edge Online recordkeeping and reporting was rated #1 in Loyalty and Overall Satisfaction for the fourth year in a row by Group Five, an independent consulting and research firm, in its 2015 Stock Plan Administration Study Industry Report.
Balance Sheet Management
The balance sheet management segment serves as a means to maximize the value of our customer deposits, focusing on asset allocation and managing credit, liquidity and interest rate risks. The balance sheet management segment manages our legacy loan portfolio which has been in run-off since 2008, as well as agency mortgage-backed securities, and other investments. Funding sources consist primarily of deposits and customer payables which originate in the trading and investing segment.
For statistical information regarding products and services, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). Three years of segment financial performance and data can be found in the MD&A and in Note 20—Segment Information of Item 8. Financial Statements and Supplementary Data.


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SALES AND CUSTOMER SERVICE
We believe providing superior sales and customer service is fundamental to our business. We strive to maintain a high standard of customer service by staffing the customer support team with appropriately trained personnel who are equipped to handle customer inquiries in a prompt yet thorough manner. All customer-facing employees are Series 7 registered. Our customer service representatives utilize our proprietary web-based platform that enables our team to reduce the number of touch-points required to answer customer inquiries. We also have specialized customer service programs that are tailored to the needs of each core customer group.
We provide sales and customer support through the following channels of our registered broker-dealer and investment advisory subsidiaries:
Branches - we have 30 branches located across the U.S. where retail investors can get face-to-face support and guidance. Financial consultants are available on-site to help customers assess their current asset allocation and develop plans to help them achieve their investment goals. Customers can also contact our financial consultants via phone or e-mail if they cannot visit the branches.
Online - we have an Online Advisor tool available that provides asset allocation and a range of investment solutions that can be managed online or through a dedicated investment professional. We also have an Online Service Center where customers can request services on their accounts and obtain answers to frequently asked questions. The online service center also provides customers with the ability to send a secure message and/or engage in Live Chat with one of our customer service representatives. In addition, we offer our Investor Education Center, providing customers with access to a variety of live and on-demand educational content and courses.
Phone - we have a toll free number that connects customers to the appropriate department where a financial consultant or Series 7 licensed customer service representative can assist with the customer's inquiry.
COMPETITION
The online financial services market continues to evolve and remains highly competitive. Our trading and investing segment competes with full service brokerage firms, Registered Investment Advisers ("RIAs"), discount brokerage firms, online brokerage firms, personal finance start-ups, Internet banks and traditional "brick & mortar" retail banks and thrifts. Some of these competitors provide online trading and banking services, investment advisor services, robo-advice capabilities, touchtone telephone and voice response banking services, electronic bill payment services and a host of other financial products. Our balance sheet management segment competes with all users of market liquidity, including the types of competitors listed above, in order to obtain the least expensive source of funding.
The financial services industry has become more concentrated, driven by consolidation over time. The proliferation of emerging financial technology start-ups further evidences the continued shift to digital advice. We believe we are well-positioned to capitalize on these trends and to continue to attract and retain retail customers, given our digital roots and our innovative, easy-to-use platforms and financial products.
We also face competition in attracting and retaining qualified employees. Our ability to compete effectively in financial services will depend upon our ability to attract new employees, and retain and motivate our existing employees while efficiently managing compensation-related costs.
REGULATION
Our business is subject to regulation by U.S. federal and state regulatory agencies and various non-U.S. governmental agencies and certain self-regulatory organizations, such as central banks and securities exchanges, that have been charged with the protection of the financial markets and the protection of the interests of those participating in those markets. We have been, along with other large financial institutions, subject to a broad range of recently adopted rules and regulations and a climate of heightened regulatory scrutiny, particularly with respect to compliance with laws and regulations, including our controls and business processes. As our business and our balance sheet grow, we may become subject to additional regulations and heightened scrutiny by our regulators, as applicable to larger financial institutions. For example, certain regulations become applicable to financial institutions with average total consolidated assets of at least $50 billion for the four most recent consecutive quarters.

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Our primary regulators in the U.S. include, among others, the SEC, the Financial Industry Regulatory Authority ("FINRA"), The NASDAQ Stock Market ("NASDAQ"), the Commodity Futures Trading Commission ("CFTC"), the National Futures Association ("NFA"), the FDIC, the Board of Governors of the Federal Reserve System ("Federal Reserve"), the Municipal Securities Rulemaking Board, the Office of the Comptroller of the Currency ("OCC") and the Consumer Financial Protection Bureau ("CFPB").
The Federal Reserve has primary jurisdiction for the supervision and regulation of savings and loan holding companies, including the Company. We are required to file periodic reports with the Federal Reserve and are subject to examination and supervision by it. The Federal Reserve has issued guidance aligning the supervisory and regulatory standards of savings and loan holding companies more closely with the standards applicable to bank holding companies on such matters as liquidity risk management, securitizations, operational risk management, internal controls and audit systems, business continuity and compensation and other employee benefits.
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") was signed into law in July 2010. It requires various federal agencies to adopt a broad range of new rules and regulations. Although the majority of the required rules and regulations have now been finalized, many still remain in proposed form or have yet to be proposed and the substance and full impact of the Act may not fully be known for months or years.
Both our brokerage and banking entities are subject to the Bank Secrecy Act, as amended by the USA PATRIOT ACT of 2001 ("BSA/USA PATRIOT Act"), which requires financial institutions to develop anti-money laundering ("AML") programs to assist in the prevention and detection of money laundering and combating terrorism. In order to comply with the BSA/USA PATRIOT Act, we have an AML department that is responsible for developing and implementing our enterprise-wide programs for compliance with the various anti-money laundering and counter-terrorist financing laws and regulations. Our brokerage and banking entities are also subject to U.S. sanctions laws administered by the Office of Foreign Assets Control and we have policies and procedures in place to comply with these laws.
Our regulators, including regulatory examiners, are increasingly focused on ensuring that our customer privacy, data protection and information security-related policies and practices are adequate to inform consumers of our data collection, use, sharing and/or security practices, to provide them with choices, if required, about how we use and share their information, and to safeguard their personal information. We maintain systems designed to comply with these privacy, data protection and information security requirements, including procedures designed to securely process, transmit and store confidential information and protect against unauthorized access to such information. For customer privacy and information security, under the rules of the Gramm-Leach-Bliley Act of 1999, our brokerage and banking entities are required to disclose their privacy policies and practices related to sharing customer information with affiliates and non-affiliates. These rules also give customers the ability to "opt out" of having non-public information disclosed to third parties or receiving marketing solicitations from affiliates and non-affiliates based on non-public information received from our brokerage and banking entities.
Brokerage Regulation
Our U.S. broker-dealers are registered with the SEC and are subject to regulation by the SEC and by self-regulatory organizations, such as FINRA and the securities exchanges of which each is a member, as well as various state regulators. In addition, E*TRADE Clearing and E*TRADE Securities are registered with the CFTC as a futures commission merchant and introducing broker, respectively, and are both members of the NFA. Such regulation covers various aspects of these businesses, including for example, client protection, net capital requirements, required books and records, safekeeping of funds and securities, trading, prohibited transactions, public offerings, margin lending, customer qualifications for margin and options transactions, registration of personnel and transactions with affiliates. Our international broker-dealers are regulated by their respective local regulators such as the Hong Kong Securities & Futures Commission.
The Dodd-Frank Act includes various provisions that affect the regulation of broker-dealers, futures commission merchants and introducing brokers. For example, the SEC is authorized to adopt a fiduciary duty standard applicable to broker-dealers when providing personalized securities investment advice to retail customers. To date, the SEC has not proposed any rulemaking under this authority.
The U.S. Department of Labor has proposed revisions to regulations under the Employee Retirement Income Security Act of 1974 that could subject broker-dealers to a fiduciary duty and prohibit specified transactions for a

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wider range of customer interactions. For the business activities affected, these developments may impact how we conduct business, decrease profitability and increase potential liabilities.
Banking Regulation
Our banking entities are subject to regulation, supervision and examination for safety and soundness by the Federal Reserve, OCC, FDIC and CFPB for compliance with federal consumer finance laws. Such regulation covers all aspects of the banking business, including lending practices, safeguarding deposits, customer privacy and information security, capital structure, transactions with affiliates and conduct and qualifications of personnel.
Each of our banking entities has deposits insured by the FDIC and pays quarterly assessments to the Deposit Insurance Fund ("DIF"), maintained by the FDIC, for this insurance coverage. On October 22, 2015, the FDIC released a notice of a proposed rulemaking to add a surcharge to the regular deposit insurance fund assessments of banks with $10 billion or more in assets, which would include E*TRADE Bank. If this rule were finalized as proposed, E*TRADE Bank would be subject to an additional surcharge applied to its assessment base, beginning sometime in 2016 and likely continuing through 2018. The comment period ended on January 5, 2016 and we continue to monitor the developments related to this proposed rulemaking.
Under the Home Owners’ Loan Act (“HOLA”), the OCC requires E*TRADE Bank to comply with the qualified thrift lender (“QTL”) test. Under the QTL test, E*TRADE Bank is required to maintain at least 65% of its “portfolio assets” in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities, credit card loans, student loans and small business loans) in at least nine months of the most recent 12-month period. E*TRADE Bank currently meets that test. A savings association that fails to meet the QTL test is subject to certain operating restrictions and may be required to convert to a national bank charter.
In addition, in certain circumstances each of our banking entities may be subject to restrictions on its ability to declare dividends or make capital distributions. A federal savings association, such as E*TRADE Bank, must file an application with the OCC if, among other things, the association would not be at least “adequately capitalized” following the distribution. Where no application is required, a federal savings association is still required to provide the OCC with notice of the proposed distribution. Federal savings associations such as E*TRADE Bank that are subsidiaries of savings and loan holding companies must also file an informational notice of a proposed dividend with the Federal Reserve. If the association is not otherwise required to file an application or notice with the OCC, it must provide the OCC with a copy of the notice at the same time that it is filed with the Federal Reserve.
Banking Regulatory Capital Requirements
Given the parent company's designation as a savings and loan holding company, the applicability and timing of adoption of certain banking regulations has varied for the parent company and E*TRADE Bank. The Dodd-Frank Act now requires all companies, including savings and loan holding companies, that directly or indirectly control an insured depository institution to serve as a source of strength for the institution and resulted in new banking regulatory capital requirements at the parent company, effective January 1, 2015. Previously, only E*TRADE Bank was subject to banking regulatory capital requirements.
In July 2013, the U.S. Federal banking agencies finalized a rule to implement Basel III in the U.S., which provides the framework for the calculation of a banking organization’s regulatory capital and risk-weighted assets. The rule became effective for us and for E*TRADE Bank on January 1, 2015, subject to a phase-in period for certain requirements over several years. The Basel III rule establishes Common Equity Tier 1 capital as a new tier of capital, raises the minimum thresholds for required capital, increases minimum required risk-based capital ratios, narrows the eligibility criteria for regulatory capital instruments, provides for new regulatory capital deductions and adjustments, and modifies methods for calculating risk-weighted assets (the denominator of risk-based capital ratios) by, among other things, strengthening counterparty credit risk capital requirements.
The Basel III final rule also introduces a capital conservation buffer that limits a banking organization’s ability to make capital distributions and discretionary bonus payments to executive officers if a banking organization fails to maintain a Common Equity Tier 1 capital conservation buffer of more than 2.5%, on a fully phased-in basis, of total risk-weighted assets above each of the following minimum risk-based capital ratio requirements: Common Equity Tier 1 (4.5%), Tier 1 (6.0%), and total risk-based capital (8.0%). This requirement was effective beginning on January 1, 2016, and will be fully phased-in by 2019. Certain new regulatory deductions and adjustments are subject to a

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phase-in period over a four year period, beginning at 40% in 2015 and fully implemented at 100% in 2018. We expect to remain compliant with the Basel III framework as it is phased-in.
Several elements of the final rule had a meaningful impact to us. The vast majority of our margin receivables now qualify for 0% risk-weighting and a larger portion of our deferred tax assets can be included in regulatory capital, both favorably impacting our current capital ratios. A portion of this benefit is offset by the phasing-out of our trust preferred securities ("TRUPs") from the parent company's capital. In addition, upon adoption, we made the one-time, permanent election to exclude accumulated other comprehensive income ("AOCI") from the calculation of Common Equity Tier 1 capital.
Prompt Corrective Action
The FDIC Improvement Act of 1991 requires the appropriate federal banking regulator to take "prompt corrective action" with respect to a depository institution if that institution does not meet certain capital adequacy standards. While these regulations apply only to banks, such as E*TRADE Bank, the Federal Reserve is authorized to take appropriate action against the parent savings and loan holding company, such as E*TRADE Financial Corporation, based on the undercapitalized status of any bank subsidiary. In certain instances, we would be required to guarantee the performance of a capital restoration plan if our bank subsidiary were undercapitalized.
Derivatives
Title VII of the Dodd-Frank Act subjects derivatives that we enter into for hedging, risk management and other purposes to a comprehensive regulatory regime. This regime requires central clearing and execution on designated markets or execution facilities for certain standardized derivatives and imposes or will impose margin, documentation, trade reporting and other new requirements. We are currently in compliance with these requirements as they apply to our activities, and they did not have a material impact on our operations.
Volcker Rule
In December 2013, the Federal Reserve, OCC, FDIC, SEC and CFTC issued final rules to implement section 619 of the Dodd-Frank Act (these rules collectively known as the "Volcker Rule"). The Volcker Rule imposes prohibitions and restrictions on the ability of banking entities and nonbank financial companies to engage in proprietary trading, and to have certain interests in, or relationships with, hedge funds or private equity funds. Banking entities were required to bring all of their activities and investments into conformance with the Volcker Rule by July 21, 2015, subject to certain extensions. In addition, the Volcker Rule requires banking entities to have comprehensive compliance programs reasonably designed to ensure and monitor compliance with the Volcker Rule. We are currently in compliance with all Volcker Rule requirements applicable to our operations.
Stress Testing
On October 9, 2012, federal banking regulators issued final rules implementing provisions of the Dodd-Frank Act that require banking organizations with total consolidated assets of more than $10 billion but less than $50 billion to conduct annual company-run stress tests, report the results to their primary federal regulator and the Federal Reserve and publish a summary of the results. Under the rules, stress tests must be conducted using certain scenarios (baseline, adverse and severely adverse), which the Federal Reserve will publish by November 15 of each year.
Under these rules, E*TRADE Bank was required to conduct its first stress test using financial statement data as of September 30, 2013, and to submit the results prior to March 31, 2014. Beginning with its second annual stress test in 2015, E*TRADE Bank is now required to publish summary results of its annual stress test between June 15 and June 30 each year. Accordingly, in 2015, E*TRADE Bank submitted and we published on our website the results of E*TRADE Bank's second annual stress test, as required.
Under the final Federal Reserve regulations, the parent company will be required to: conduct its first annual stress test using financial statement data as of September 30, 2016, report the results of our first annual stress test to the Federal Reserve on or before March 31, 2017, and disclose a summary of our stress test results in June 2017.
For additional regulatory information on our brokerage and banking regulations, see Note 17—Regulatory Requirements of Item 8. Financial Statements and Supplementary Data.

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AVAILABLE INFORMATION
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, available free of charge at our website as soon as reasonably practicable after they have been filed with the SEC. Our website address is www.etrade.com. Information on our website is not part of this report.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains the materials we file with the SEC at www.sec.gov.
ITEM 1A.    RISK FACTORS
The following discussion sets forth the risk factors which could materially and adversely affect our business, financial condition and results of operations, and should be carefully considered in addition to the other information set forth in this report. Additional risks and uncertainties not currently known to us or that we currently do not deem to be material may also adversely affect our business, financial condition and results of operations.
Risks Relating to the Nature and Operation of Our Business
Turmoil in the global financial markets could reduce trading volumes and margin lending and increase our dependence on our more active customers who receive lower pricing, resulting in lower revenues.
Digital investing services to the retail customer, including trading, margin lending and sweep deposits, account for a significant portion of our revenues. Turmoil in the global financial markets could lead to changes in volume and price levels of securities transactions which may, in turn, result in lower trading volumes and margin lending. In particular, a decrease in trading activity within our lower activity accounts could impact revenues and increase dependence on more active trading customers who receive more favorable pricing based on their trade volume. A decrease in trading activity or securities prices would also typically be expected to result in a decrease in margin lending, which would reduce the revenue that we generate from interest charged on margin receivables and increase our credit risk because the value of the collateral could fall below the amount of indebtedness it secures.
We may be unsuccessful in managing the effects of changes in interest rates and the enterprise interest-earning assets in our portfolio.
Net operating interest income is an important source of our revenue. Our results of operations depend, in part, on our level of net operating interest income and our effective management of the impact of changing interest rates and varying asset and liability maturities. Our ability to manage interest rate risk could impact our financial condition. We use derivatives as hedging instruments to reduce the potential effects of changes in interest rates on our results of operations. However, the derivatives we utilize may not be completely effective at managing this risk and changes in market interest rates and the yield curve could reduce the value of our financial assets and reduce our net operating interest income.
Enterprise net interest spread may fluctuate based on the size and mix of the balance sheet, as well as the impact from the interest rate environment.
We will continue to experience losses in our mortgage loan portfolio.
At December 31, 2015, the principal balance of our one-to four-family loan portfolio was $2.5 billion and the allowance for loan losses for this portfolio was $40 million. At December 31, 2015, the principal balance of our home equity loan portfolio was $2.1 billion and the allowance for loan losses for this portfolio was $307 million. Although the provision for loan losses has declined in recent periods and we recognized a provision benefit for loan losses of $40 million during the year ended December 31, 2015, performance is subject to variability in any given quarter and we cannot state with certainty that the declining loan loss trend will continue. Due to the complexity and judgment required by management about the effect of matters that are inherently uncertain, there can be no assurance that our allowance for loan losses will be adequate. In the normal course of conducting examinations, our banking regulators, the OCC and Federal Reserve, continue to review our policies and procedures. This process is dynamic and ongoing and we cannot be certain that additional changes or actions to our policies and procedures will not result from their

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continuing review. We may be required under such circumstances to further increase the allowance for loan losses, which could have an adverse effect on our regulatory capital position and our results of operations in future periods.
Certain characteristics of our mortgage loan portfolio indicate an increased risk of loss. For example, at December 31, 2015:
approximately 14% and 34% of the one- to four-family and home equity loan portfolios, respectively, had a current loan-to-value ("LTV")/combined loan-to-value ("CLTV") of greater than 100%;
borrowers with current Fair Isaac Credit Organization ("FICO") scores less than 700 consisted of approximately 33% and 39% of the one- to four-family and home equity loan portfolios, respectively; and
approximately 39% and 50% of the one- to four-family and home equity loan portfolios, respectively, were not yet amortizing.
The foregoing factors are among the key items we track to predict and monitor credit risk in our mortgage portfolio, together with loan type, housing prices, loan vintage and geographic location of the underlying property. We believe the relative importance of these factors varies, depending upon economic conditions. Home equity loans have certain characteristics that result in higher risk than first lien, amortizing one- to four-family loans. For example, at December 31, 2015:
approximately 87% of the home equity loan portfolio are second lien loans on residential real estate properties;
we hold both the first and second lien positions in less than 1% of the home equity loan portfolio; and
the majority of home equity lines of credit convert to amortizing loans at the end of the draw period, which typically ranges from five to ten years, while approximately 4% of this portfolio will require the borrowers to repay the loan in full at the end of the draw period, commonly referred to as "balloon loans."
Second lien loans carry higher credit risk because the holder of the first lien mortgage has priority in right of payment. Therefore, downturns in real estate markets may result in the value of the collateral being insufficient to cover the second lien positions. In addition, in loans for which we do not hold the first lien positions, we are exposed to risk associated with the actions and inactions of the first lien holder. The average estimated current CLTV on our home equity loan portfolio was 90% as of December 31, 2015.
We monitor our borrowers by refreshing FICO scores and CLTV information on a quarterly basis. We do not have access to complete data on the first lien positions of second lien home equity loans. Actual loan defaults and delinquencies of amortizing home equity lines of credit that exceed our current expectations could negatively impact our financial performance.
We rely on third party service providers to perform certain key functions and any failure to perform those functions as a result of operational or technological failure, including cybersecurity attacks on our third party service providers could result in the interruption of our operations and systems and could result in significant costs and reputational damage to us.
We rely on third party service providers for certain technology, processing, servicing and support functions. These third party service providers are also susceptible to operational and technology vulnerabilities, which may impact our business. In addition, these third party service providers may rely on other parties (also referred to as “fourth parties” or sub-contractors) to provide services to us which also face similar risks. For example, external content providers provide us with financial information, market news, quotes, research reports and other fundamental data that we offer to clients. We do not directly service any of our loans and, as a result, we rely on third party vendors and servicers to provide information on our loan portfolio. These services cover payment information on home equity loans, including which borrowers are paying only the minimum amount due.
As part of our enterprise risk management program build-out, we have invested in our third party oversight capabilities which included enhanced processes to evaluate third party providers, designed to verify that the third party service providers can support the stability of our operations and systems. However, these efforts may be insufficient

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and we cannot assure you that we will not experience a failure as a result of a third party service provider. Any significant failures or security breaches by or of our third party service providers or their sub-contractors, including any actual or perceived cybersecurity attacks, security breaches, fraud, phishing attacks, acts of vandalism, information security breaches and computer viruses which could result in unauthorized access, misuse, loss or destruction of data, an interruption in service or other similar events could interrupt our business, cause us to incur losses, subject us to fines or litigation and harm our reputation. An interruption in or the cessation of service by any third party service provider and our inability to make alternative arrangements in a timely manner could have a material impact on our ability to offer certain products and services and cause us to incur losses. We cannot assure you that any of these third party service providers or their sub-contractors will be able to continue to provide their products and services in an efficient, cost effective manner, if at all, or that they will be able to adequately expand their services to meet our needs and those of our customers. We may incur significant additional costs to implement enhanced protective measures and technology, to investigate and remediate vulnerabilities or other exposures or to make required notifications.
We expect that our regulators will hold us responsible for any deficiencies in our oversight and control of our third party relationships and for the performance of such third parties. If there were deficiencies in the oversight and control of our third party relationships, and if our regulators held us responsible for those deficiencies, our business, reputation, and results of operations could be adversely affected.
We conduct all of our operations through subsidiaries and rely on dividends from our subsidiaries for a substantial amount of our cash flows.
We depend on dividends, distributions and other payments from our subsidiaries to fund payments on our obligations, including our debt obligations. Regulatory and other legal restrictions limit our ability to transfer funds to or from certain subsidiaries. In addition, many of our subsidiaries are subject to laws and regulations that authorize regulatory bodies to block or reduce the flow of funds to us, or that prohibit such transfers altogether in certain circumstances. These laws and regulations may hinder our ability to access funds that we may need to make payments on our obligations, including our debt obligations, and otherwise conduct our business.
In particular, a savings association that is part of a savings and loan holding company structure, such as E*TRADE Bank, must file a notice of a declaration of a dividend with the Federal Reserve at least 30 days before the proposed dividend declaration by the bank’s board of directors. OCC regulations set forth the circumstances under which a federal savings association is required to submit an application or notice before it may make a capital distribution. See Item 1. Business—Regulation for additional information.
As of December 31, 2015, much of our capital was invested in our banking subsidiary E*TRADE Bank. Subject to non-objection by the Federal Reserve, we plan to request ongoing quarterly dividends in the amount of E*TRADE Bank's net income from the previous quarter. The Federal Reserve may object to a proposed capital distribution if, among other things, E*TRADE Bank is, or as a result of such dividend or distribution would be, undercapitalized or it has safety and soundness concerns. We cannot be certain, however, that we will receive regulatory approval for such contemplated dividends at the requested levels or at all.
Under the OCC stress test regulations, E*TRADE Bank is required to conduct stress-testing using the prescribed stress-testing methodologies. The final OCC regulations require E*TRADE Bank to conduct its stress test using financial statement data as of September 30 of each year, and to submit the results prior to March 31 of the following year. Accordingly, E*TRADE Bank began conducting its first annual stress test using financial statement data as of September 30, 2013, and submitted the results prior to March 31, 2014. Beginning with its second annual stress test, E*TRADE Bank is now required to publish summary results of its annual stress test between June 15 and June 30 each year. In 2015, E*TRADE Bank submitted and published the results of its second annual stress test, as required. The OCC analyzes and provides feedback on the quality of E*TRADE Bank's stress test process and results. While there is no formal mechanism for the OCC to "pass" or "fail" E*TRADE Bank's stress test processes and results, it will likely consider these processes and results in evaluating proposed actions that may affect our bank's capital, including but not limited to redemption or repurchase of regulatory capital instruments, dividends and mergers and acquisitions. If the OCC were to object to any such proposed action, our business prospects, results of operations and financial condition could be adversely affected.


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We operate in a highly competitive industry where many of our competitors have greater financial, technical, marketing and other resources.
The financial services industry is highly competitive, with multiple industry participants competing for the same customers. Many of our competitors have longer operating histories and greater resources than we have and offer a wider range of financial products and services. Other of our competitors offer a more narrow range of financial products and services and have not been as susceptible to the disruptions in the credit markets that have impacted us, and therefore have not suffered the losses we have. The impact of competitors with superior name recognition, greater market acceptance, larger customer bases or stronger capital positions could adversely affect our revenue growth and customer retention. Our competitors may also be able to respond more quickly to new or changing opportunities and demands and withstand changing market conditions better than we can. Competitors may conduct extensive promotional activities, offering better terms, lower prices and/or different products and services or combinations of products and services that could attract current and prospective E*TRADE customers and potentially result in intensified price competition within the industry. We may not be able to match the marketing efforts or prices of our competitors due to our financial position and cost structure. Some of our competitors may also benefit from established relationships among themselves or with third parties enhancing their products and services.
In addition, we compete in a technology-intensive industry characterized by rapid innovation. We may be unable to effectively use new technologies, adopt our services to emerging industry standards or develop, introduce and market enhanced or new products and services. If we are not able to update or adapt our products and services to take advantage of the latest technologies and standards, or are otherwise unable to tailor the delivery of our services to the latest personal and mobile computing devices preferred by our retail customers, our business and financial performance could suffer.
Our ability to compete successfully in the financial services industry depends on a number of factors, including, among other things:
maintaining and expanding our market position;
attracting and retaining customers;
providing easy to use and innovative financial products and services;
our reputation and the market perception of our brand and overall value;
maintaining competitive pricing;
competing in a concentrated competitive landscape;
the quality of our technology (including cybersecurity defenses), products and services;
deploying a secure and scalable technology and back office platform;
innovating effectively in launching new or enhanced products;
the differences in regulatory oversight regimes to which we and our competitors are subject;
attracting new employees and retaining our existing employees; and
general economic and industry trends.
Our competitive position within the industry could be adversely affected if we are unable to adequately address these factors, which could have a material adverse effect on our business and financial condition.
If we do not successfully participate in consolidation opportunities, we could be at a competitive disadvantage.
There has been significant consolidation in the financial services industry and this consolidation may continue in the future. If we fail to take advantage of viable consolidation opportunities, our competitors may be able to capitalize on those opportunities and take advantage of greater scale and cost efficiencies to our detriment.
We may seek to acquire businesses in the future, although the terms of our corporate debt, including the senior secured revolving credit facility, may impact our ability to do so. Our retention of customers’ assets may be impacted by our ability to successfully integrate the acquired operations, products (including pricing) and personnel. Diversion of management attention from other business concerns could have a negative impact on our business. If we are not successful in our integration efforts, we may experience significant attrition in the acquired accounts or experience other issues that would prevent us from achieving the level of revenue enhancements and cost savings that

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we expect with respect to an acquisition. Further, an acquisition may cause us to assume unknown material liabilities or become subject to litigation or regulatory proceedings. In addition, if a portion or all of the purchase price of an acquisition is paid through an issuance of our common stock, that issuance would be dilutive to our current stockholders. Acquisitions are typically subject to closing conditions, including regulatory approvals, and there can be no assurances that any acquisition will close on the expected terms or within the expected time frame, or at all. We may fail to realize the anticipated benefits of an acquisition which could have a material adverse effect on our business and results of operations.
We rely heavily on technology, which can be subject to interruption and instability due to operational and technological failures, both internal and external.
We rely on technology, particularly the Internet and mobile services, to conduct much of our business activity and allow our customers to conduct financial transactions. Our systems and operations, including our primary and disaster recovery data center operations, are vulnerable to disruptions from human error, natural disasters, power outages, computer and telecommunications failures, software bugs, computer viruses or other malicious software, distributed denial of service attacks, spam attacks, security breaches and other similar events. In addition, extraordinary trading volumes or site usage could cause our computer systems to operate at an unacceptably slow speed or even fail. Disruptions to, instability of or other failure to effectively maintain our information technology systems or external technology that allows our customers to use our products and services could harm our business and our reputation. Should our technology operations be disrupted, we may have to make significant investments to upgrade, repair or replace our technology infrastructure and may not be able to make such investments on a timely basis. While we have made significant investments designed to enhance the reliability and scalability of our operations, we cannot assure you that we will be able to maintain, expand and upgrade our systems and infrastructure to meet future requirements and mitigate future risks on a timely basis or that we will be able to retain skilled information technology employees. Disruptions in service and slower system response times could result in substantial losses, decreased client service and satisfaction, customer attrition and harm to our reputation. In addition, technology systems, including our own proprietary systems and the systems of third parties on whom we rely to conduct portions of our operations, are potentially vulnerable to security breaches and unauthorized usage. An actual or perceived breach of the security of our technology could harm our business and our reputation. Further, any actual or perceived breach or cybersecurity attack directed at other financial institutions or financial services companies, whether or not we are impacted, could lead to a general loss of customer confidence in the use of technology to conduct financial transactions, which could negatively impact us, including the market perception of the effectiveness of our security measures and technology infrastructure. The occurrence of any of these events may have a material adverse effect on our business or results of operations.
Further, because our business model relies heavily on our customers’ use of their own personal computers, mobile devices and the Internet, our business and reputation could be harmed by security breaches of our customers and third parties. Computer viruses and other attacks on our customers’ personal computer systems, home networks and mobile devices or against the third-party networks and systems of internet and mobile service providers could create losses for our customers even without any breach in the security of our systems, and could thereby harm our business and our reputation. As part of our E*TRADE Complete Protection Guarantee, we reimburse our customers for losses caused by a breach of security of our customers’ own personal systems. Such reimbursements may not be covered by applicable insurance and could have a material impact on our financial performance and results of operations.
Unauthorized disclosure of confidential customer information, whether through a breach of our computer systems or those of our customers or third parties, may subject us to significant liability and reputational harm.
As part of our business, we are required to collect, use and store customer, employee and third party personally identifiable information ("PII"). This may include, among other information, names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers and account information. We maintain systems including procedures designed to securely process, transmit and store confidential information (including PII) and protect against unauthorized access to such information. We also require our third party service providers to have adequate security if they have access to PII. However, these risks have grown in recent years due to increased sophistication and activities of organized crime, hackers, terrorists and other external parties. For example, we, and other financial institutions, experienced a cyber-incident in 2013 which resulted in certain customer contact information being compromised and potentially accessed by unauthorized third parties. As of the date of this Annual

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Report, we are unaware of any financial fraud or other misuse of customer data resulting from this incident.  We are cooperating with government agencies in connection with their investigation.
We have continued to invest in our technology infrastructure, including sophisticated security measures, but, despite these investments, we, our customers and our third party service providers may be vulnerable to additional security breaches, phishing attacks, acts of vandalism, information security breaches, computer viruses or other cybersecurity attacks which could result in unauthorized access, misuse, loss or destruction of data, an interruption in service or other similar events. In addition, because the methods and techniques employed by organized crime, hackers, terrorists and other external parties are increasingly sophisticated and often are not fully recognized or understood until after they have been launched, we may be unable to anticipate, detect or implement effective preventative measures against cybersecurity attacks, which could result in substantial exposure of either employee or customer PII. Any security breach, real or perceived, involving the misappropriation, loss or other unauthorized disclosure of PII, whether by us, our customers or our third party service providers, could severely damage our reputation, expose us to the risk of litigation and liability, disrupt our operations and have a materially adverse effect on our business. In addition, although we maintain insurance coverage that we believe is reasonable, prudent and adequate for the purpose of our business, it may be insufficient to protect us against all losses and costs stemming from security breaches, cyber-attacks and other types of unlawful activity, or any resulting disruptions from such events. Future legislation and regulatory action regarding cybersecurity or PII could result in increased costs and compliance efforts.
We may suffer losses due to credit risk associated with margin lending, securities loaned transactions or financial transactions with counterparties.
We permit certain customers to purchase securities on margin. A downturn in securities markets may impact the value of collateral held in connection with margin receivables and may reduce its value below the amount borrowed, potentially creating collections issues with our margin receivables. In addition, we frequently borrow securities from and lend securities to other broker-dealers. Under regulatory guidelines, when we borrow or lend securities, we must simultaneously disburse or receive cash deposits. A sharp change in security market values may result in losses if counterparties to the borrowing and lending transactions default on their obligations. We also engage in financial transactions with counterparties, including repurchase agreements, that expose us to credit losses in the event counterparties cannot meet their obligations. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management for additional information.
Advisory services subject us to additional risks.
We provide advisory services to investors to aid them in their decision making. Investment recommendations and suggestions are based on publicly available documents and communications with investors regarding investment preferences and risk tolerances. Publicly available documents may be inaccurate and misleading, resulting in recommendations or transactions that are inconsistent with investors’ intended results. In addition, advisors may not understand investor needs or risk tolerances, which may result in the recommendation or purchase of a portfolio of assets that may not be suitable for the investor. Risks associated with advisory services also include those arising from possible conflicts of interest, inadequate due diligence, inadequate disclosure, human error and fraud. To the extent that we fail to know our customers or improperly advise them, we could be found liable for losses suffered by such customers, which could harm our reputation and business.
Our corporate debt may limit how we conduct our business.
We have $1 billion of corporate debt and have the capacity to incur $250 million in additional indebtedness under our senior secured revolving credit facility, subject to certain restrictive covenants. Our expected annual debt service interest payment is approximately $50 million. Our ratio of corporate debt to equity (expressed as a percentage) was 17% at December 31, 2015. The degree to which we are leveraged could have important consequences, including:
a substantial portion of our cash flow from operations is dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available for other purposes;
our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other corporate needs may be limited; and

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our leverage may affect our ability to adjust rapidly to changing market conditions and make us more vulnerable in the event of a downturn in general economic conditions or our business.
In addition, a significant reduction in revenues could have a material adverse effect on our ability to meet our debt obligations. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition, operating performance and our ability to receive dividend payments from our subsidiaries, which is subject to prevailing economic and competitive conditions, regulatory approval or notification and certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In addition, the terms of existing or future debt instruments may restrict us from adopting some of these alternatives.
Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness.
We have a significant deferred tax asset and cannot assure it will be fully realized.
We had net deferred tax assets of $1.0 billion at December 31, 2015. We did not establish a valuation allowance against our federal net deferred tax assets at December 31, 2015 as we believe that it is more likely than not that all of these assets will be realized. In evaluating the need for a valuation allowance, we estimated future taxable income based on management approved forecasts. This process required significant judgment by management about matters that are by nature uncertain. If future events differ significantly from our current forecasts, a valuation allowance may need to be established, which could have a material adverse effect on our results of operations and our financial condition. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Summary of Critical Accounting Policies and Estimates for additional information.
As a result of a registered offering of our common stock, an exchange of certain of our debt securities and related transactions in 2009, we believe that we experienced an "ownership change" for tax purposes that could cause us to permanently lose a significant portion of our U.S. federal and state deferred tax assets.
As a result of a registered offering of our common stock, an exchange of certain of our debt securities and related transactions in 2009, we believe that we experienced an "ownership change" as defined under Section 382 of the Internal Revenue Code of 1986, as amended ("Section 382") (which is generally a greater than 50 percentage point increase by certain "5% shareholders" over a rolling three year period). Section 382 imposes an annual limitation on the utilization of deferred tax assets, such as net operating loss carryforwards and other tax attributes, once an ownership change has occurred. Depending on the size of the annual limitation (which is in part a function of our market capitalization at the time of the ownership change) and the remaining carryforward period of the tax assets (U.S. federal net operating losses generally may be carried forward for a period of 20 years), we could realize a permanent loss of a portion of our U.S. federal and state deferred tax assets and certain built-in losses that have not been recognized for tax purposes. It is possible the tax ownership change will extend the period of time it will take to fully utilize our pre-ownership change net operating losses ("NOLs"); however, we believe it will not limit the total amount of pre-ownership change federal NOLs we can utilize. This is a complex analysis and requires us to make certain judgments in determining the annual limitation. As a result, it is possible that we could ultimately lose a portion of our deferred tax assets, which could have a material adverse effect on our results of operations and financial condition.



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Risks Relating to the Regulation of Our Business
We are subject to extensive government regulation, including banking and securities rules and regulations, which could restrict our business practices.
The securities and banking industries are subject to extensive regulation. Our broker-dealer subsidiaries must comply with many laws and rules, including rules relating to sales practices and the suitability of recommendations to customers, possession and control of customer funds and securities, margin lending, execution and settlement of transactions and anti-money laundering.
Similarly, E*TRADE Financial Corporation and ETB Holdings, Inc., as savings and loan holding companies, and E*TRADE Bank and E*TRADE Savings Bank, as federally chartered savings banks, are subject to extensive regulation, supervision and examination by the OCC and the Federal Reserve and, in the case of the savings banks, also the FDIC and CFPB. Such regulation covers all banking business, including lending practices, safeguarding deposits, capital structure, recordkeeping, transactions with affiliates and conduct and qualifications of personnel.
In providing services to clients, we manage, use and store sensitive customer data including PII. As a result, we are subject to numerous laws and regulations designed to protect this information, such as U.S. federal and state laws and foreign regulations governing the protection of PII. These laws have increased in complexity, change frequently and can conflict with one another.
While we have implemented policies and procedures designed to provide for compliance with all applicable laws and regulations, our regulators have broad discretion with respect to the enforcement of applicable laws and regulations and there can be no assurance that violations will not occur. Failure to comply with applicable laws and regulations and our policies could result in sanctions by regulatory agencies, litigation, civil penalties and harm to our reputation, which could have a material adverse effect on our business, financial condition and results of operations. Further, to the extent we undertake actions requiring regulatory approval or non-objection, our regulators may make their approval or non-objection subject to conditions or restrictions that could have a material adverse effect on our business, results of operations and financial condition. We also anticipate that regulators will continue to intensify their supervision through the exam process and increase their enforcement of regulations across the industry. The regulators' heightened expectations and intense supervision have and will continue to increase our costs and may limit our ability to pursue certain business opportunities.
As our business and our balance sheet grow, we may become subject to additional regulations and heightened scrutiny by our regulators, as applicable to larger financial institutions. These additional regulations may affect how we conduct our business through capital, client protection, market conduct or other requirements. In addition, our results of operations could be affected by regulations which impact the business and financial communities generally, including changes to the laws governing taxation, electronic commerce, customer privacy and security of customer data. If we fail to establish and enforce procedures to comply with applicable regulations, our failure could have a material adverse effect on our business.
Ongoing regulatory reform efforts may have a material impact on our operations. In addition, if we are unable to meet any new or ongoing requirements, we could face negative regulatory consequences, which could have a material adverse effect on our business.
In July 2010, the President signed into law the Dodd-Frank Act. This law contains various provisions designed to enhance financial stability and to reduce the likelihood of another financial crisis and significantly changed the bank regulatory structure for our Company and its thrift subsidiaries. Portions of the Dodd-Frank Act were effective immediately, but other portions were or will be effective following extended transition periods or through numerous rulemakings by multiple government agencies, some of which have not yet been completed. While there continues to be some uncertainty about the full impact of these changes, we do know that we are subject to a more complex regulatory framework and we will continue to incur costs to implement the new requirements as well as monitor for continued compliance.
The Federal Reserve has primary jurisdiction for the supervision and regulation of savings and loan holding companies, including the Company; and the OCC has primary supervision and regulation of federal savings associations, such as the Company’s two thrift subsidiaries. Although the Dodd-Frank Act maintained the federal thrift charter, it eliminated certain preemption, branching and other benefits of the charter and imposed new penalties for failure to comply with the QTL test. The Dodd-Frank Act also requires all companies, including savings and loan

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holding companies that directly or indirectly control an insured depository institution, to serve as a source of strength for the institution, including committing necessary capital and liquidity support.
We are required to file periodic reports with the Federal Reserve and are subject to examination and supervision by it. The Federal Reserve also has certain types of enforcement powers over us, ETB Holdings, Inc., and our non-depository institution subsidiaries, including the ability to issue cease-and-desist orders, force divestiture of our thrift subsidiaries and impose civil and monetary penalties for violations of federal banking laws and regulations or for unsafe or unsound banking practices. Our thrift subsidiaries are subject to similar reporting, examination, supervision and enforcement oversight by the OCC. The Federal Reserve has issued guidance aligning the supervisory and regulatory standards of savings and loan holding companies more closely with the standards applicable to bank holding companies. For all banks and thrifts with total consolidated assets over $10 billion, including E*TRADE Bank, the CFPB has exclusive rulemaking and examination, and primary enforcement authority, under federal consumer financial laws and regulations. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB.
For us, one of the most significant changes since the passage of Dodd-Frank has been that savings and loan holding companies such as our Company are now subject to the same capital and activity requirements as those applicable to bank holding companies. The phase-in of these capital requirements began January 1, 2015 and we will be required to comply with the fully phased-in capital standards beginning in 2019. We expect to meet the capital requirements applicable to thrift holding companies as they are phased in. However, it is possible that our regulators may impose additional, more stringent capital and other prudential standards, which could be applicable to us, prior to the end of the five year phase-in period. For example, both the OCC and the Federal Reserve have issued generally applicable final regulations that required E*TRADE Bank and will ultimately also require the parent company to conduct capital adequacy tests on their operations. Pursuant to those regulations, E*TRADE Bank disclosed a summary of these stress test results to the OCC in 2014 and 2015 and the Company will ultimately also be required to disclose a summary of its stress test results to the Federal Reserve on or before March 31, 2017.
In addition, the U.S. Department of Labor is pursuing regulations seeking to broaden the definition of who is an investment advice fiduciary and how such advice can be provided to account holders in retirement accounts such as 401(k) plans and IRAs. The final rule is expected to be issued later in 2016, and may have an adverse impact on our business.
New legislation, rule changes or changes in the interpretation or enforcement of existing laws, rules and regulations could increase our compliance costs and adversely affect our business and results of operations. For further information on how ongoing regulatory reform could affect us, see Item 1. Business—Regulation.
If we fail to comply with applicable securities and banking laws, rules and regulations, either domestically or internationally, we could be subject to disciplinary actions, damages, penalties or restrictions that could significantly harm our business.
The SEC, FINRA and other self-regulatory organizations and state securities commissions, among other things, can censure, fine, issue cease-and-desist orders or suspend or expel a broker-dealer or any of its officers or employees. The OCC and Federal Reserve may take similar action with respect to our banking and other financial activities, respectively. Similarly, the attorneys general of each state could bring legal action on behalf of the citizens of the various states to ensure compliance with local laws. Regulatory agencies in countries outside of the U.S. have similar authority. The ability to comply with applicable laws and rules is dependent in part on the establishment and maintenance of a reasonable compliance function. The failure to establish and enforce reasonable compliance procedures, even if unintentional, could subject us to significant losses or disciplinary or other actions.
During 2012, we completed a review of order handling practices and pricing for order flow between E*TRADE Securities and G1 Execution Services, LLC. We implemented the changes to our practices and procedures that were recommended during the review. Banking regulators and federal securities regulators were regularly updated during the course of the review and may initiate investigations into the Company’s historical practices which could subject it to monetary penalties and cease-and-desist orders, which could also prompt claims by customers of E*TRADE Securities. Any of these actions could materially and adversely affect us. On July 11, 2013, FINRA notified E*TRADE Securities and G1 Execution Services, LLC that it is conducting an examination of both firms’ routing practices. We are cooperating fully with FINRA in this examination. Under the agreement governing the sale of G1 Execution Services, LLC to Susquehanna International Group, LLP, we remain responsible for any resulting actions taken against G1 Execution Services, LLC as a result of such investigation.

17


We are subject to litigation and regulatory investigations and may not always be successful in defending against such claims and proceedings.
The financial services industry faces substantial litigation and regulatory risks. We are subject to arbitration claims and lawsuits in the ordinary course of our business, as well as class actions and other significant litigation. We also are the subject of inquiries, investigations and proceedings by regulatory and other governmental agencies. Actions brought against us may result in settlements, awards, injunctions, fines, penalties and other results adverse to us. Predicting the outcome of such matters is inherently difficult, particularly where claims are brought on behalf of various classes of claimants or by a large number of claimants, when claimants seek substantial or unspecified damages or when investigations or legal proceedings are at an early stage. A substantial judgment, settlement, fine or penalty could be material to our operating results or cash flows for a particular period, depending on our results for that period, or could cause us significant reputational harm, which could harm our business prospects. In market downturns, the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against financial services companies have historically increased. We are also subject to litigation claims from third parties alleging infringement of their intellectual property rights. Such litigation can require the expenditure of significant resources, regardless of whether the claims have merit. If we were found to have infringed a third-party patent or other intellectual property right, we could incur substantial liability and in some circumstances could be enjoined from using the relevant technology or providing related products and services, which could have a material adverse effect on our business and results of operations.
If we do not maintain the capital levels required by regulators, we may be fined or subject to other disciplinary or corrective actions.
The SEC, FINRA, the OCC, the Federal Reserve and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of regulatory capital by banks and net capital by securities broker-dealers. E*TRADE Bank is subject to various regulatory capital requirements administered by the OCC, and E*TRADE Financial Corporation became subject to specific capital requirements administered by the Federal Reserve on January 1, 2015. Failure to meet minimum capital requirements can trigger certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could harm E*TRADE Bank’s and E*TRADE Financial Corporation’s operations and financial statements.
E*TRADE Bank must meet specific capital guidelines that involve quantitative measures of E*TRADE Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. In July 2013, the U.S. Federal banking agencies finalized a rule to implement Basel III in the U.S., which provides the framework for the calculation of a banking organization’s regulatory capital and risk-weighted assets. The Basel III framework establishes Common Equity Tier 1 capital as a new tier of capital, raises the minimum thresholds for required capital, increases minimum required risk-based capital ratios, narrows the eligibility criteria for regulatory capital instruments, provides for new regulatory capital deductions and adjustments, and modifies methods for calculating risk-weighted assets (the denominator of risk-based capital ratios) by, among other things, strengthening counterparty credit risk capital requirements. The Basel III final regulatory framework also introduces a capital conservation buffer that limits a banking organization’s ability to make capital distributions and discretionary bonus payments to executive officers if a banking organization fails to maintain a Common Equity Tier 1 capital conservation buffer of more than 2.5%, on a fully phased-in basis, of total risk-weighted assets above each of the following minimum risk-based capital ratio requirements: Common Equity Tier 1 (4.5%), Tier 1 (6.0%), and total risk-based capital (8.0%). This requirement became effective on January 1, 2016, and will be fully phased in by 2019.
The regulatory framework became effective for the Company and E*TRADE Bank on January 1, 2015. The fully phased-in Basel III capital standards will become effective January 1, 2019 for the Company and E*TRADE Bank.
Several elements of the Basel III final capital standards had a meaningful impact to us. The vast majority of margin receivables now qualify for 0% risk-weighting, and we include a larger portion of our deferred tax assets in regulatory capital, both having a favorable impact on our current capital ratios. A portion of this benefit will be offset as we phase out TRUPs from the parent company's regulatory capital. In addition, upon adoption, we made the one-time, permanent election to exclude AOCI from the calculation of Common Equity Tier 1 capital.
The Company’s and E*TRADE Bank’s capital amounts and classification are subject to qualitative judgments by the regulators about the strength of components of its capital, risk weightings of assets, off-balance sheet

18


transactions and other factors. Any significant reduction in the Company’s or E*TRADE Bank’s regulatory capital could result in the Company or E*TRADE Bank being less than "well capitalized" or "adequately capitalized" under applicable capital standards. A failure of the Company or E*TRADE Bank to be "adequately capitalized" which is not cured within time periods specified in the indentures governing our senior secured revolving credit facility would constitute a default under our senior secured revolving credit facility and likely result in any outstanding balance on the senior secured revolving credit facility becoming immediately due and payable. In addition, if E*TRADE Bank or E*TRADE Savings Bank are less than “well capitalized” or “adequately capitalized” under applicable capital rules, the ability of E*TRADE Bank and E*TRADE Savings Bank to receive, renew or roll-over sweep deposits, which are regarded as broker deposits for purposes of the Federal Deposit Insurance Act, could be impacted. Sweep deposits are a significant source of liquidity for the savings banks, and if they were terminated by the FDIC, that could have a material negative effect on our business.
The OCC and the Federal Reserve may request we raise equity to increase the regulatory capital of the Company or E*TRADE Bank or to further reduce debt. If we were unable to raise equity, we could face negative regulatory consequences, such as restrictions on our activities, requirements that we divest ourselves of certain businesses and requirements that we dispose of certain assets and liabilities within a prescribed period. Any such actions could have a material negative effect on our business.
Similarly, failure to maintain the required net capital by our securities broker-dealers could result in suspension or revocation of registration by the SEC and suspension or expulsion by FINRA, and could ultimately lead to the firm’s liquidation. If such net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require an intensive use of capital could be limited. Such operations may include investing activities, marketing and the financing of customer account balances. Also, our ability to withdraw capital from brokerage subsidiaries could be restricted.
As a non-grandfathered savings and loan holding company, we are subject to activity limitations and requirements that could restrict our ability to engage in certain activities and take advantage of certain business opportunities.
Under applicable law, our activities are restricted to those that are financial in nature and certain real estate-related activities. Although we believe all of our existing activities and investments are permissible, we are unable to pursue future activities that are not financial in nature or otherwise real-estate related. We are also limited in our ability to invest in other savings and loan holding companies. The Dodd-Frank Act also requires savings and loan holding companies like ours, as well as all of our thrift subsidiaries, to be both "well capitalized" and "well managed" in order for us to conduct certain financial activities, such as securities underwriting. We believe that we will be able to continue to engage in all of our current financial activities. However, if we and our thrift subsidiaries are unable to satisfy the "well capitalized" and "well managed" requirements, we could be subject to activity restrictions that could prevent us from engaging in certain activities as well as other negative regulatory actions.
In addition, E*TRADE Bank is currently subject to extensive regulation of its activities and investments, capitalization, community reinvestment, risk management policies and procedures and relationships with affiliated companies. Acquisitions of and mergers with other financial institutions, purchases of deposits and loan portfolios, the establishment of new depository institution subsidiaries and the commencement of new activities by bank subsidiaries require the prior approval of the OCC and the Federal Reserve, and in some cases the FDIC, which may deny approval or condition their approval on the imposition of limitations on the scope of our planned activity. Also, these regulations and conditions could affect our ability to realize synergies from future acquisitions, negatively affect us following an acquisition and also delay or prevent the development, introduction and marketing of new products and services.

19


Risks Relating to Owning Our Stock
Our business operations are restricted by the terms of our corporate debt.
Our senior secured revolving credit facility and the indentures governing our corporate debt contain various covenants and restrictions that place limitations on our ability and certain of our subsidiaries’ ability to, among other things:
incur additional indebtedness;
create liens;
pay dividends, make distributions or other payments;
repurchase or redeem capital stock;
make investments or other restricted payments;
merge, consolidate or transfer substantially all of our assets; and
enter into transactions with our shareholders or affiliates.
As a result of the covenants and restrictions contained in the documents governing our indebtedness, we are limited in how we conduct our business and we may be unable to raise additional debt or equity financing at all or on terms sufficient to compete effectively or to take advantage of new business opportunities. Some of the covenants and restrictions described above were lifted or modified in connection with the upgrade by rating agencies of our unsecured debt to “investment grade status” in 2015; however, some covenants and restrictions may be reapplied in the event our unsecured debt falls below "investment grade status" in the future.
The senior secured revolving credit facility contains certain financial covenants, including that we maintain a minimum interest coverage ratio (as defined in the senior secured revolving credit facility) of 3.0 to 1.0, a maximum total leverage ratio, a maximum asset quality ratio, certain capitalization requirements for the parent company and certain of its subsidiaries and at least $100 million in unrestricted cash at the parent company.
We could be forced to repay immediately any outstanding borrowings under the senior secured revolving credit facility and outstanding debt securities at their full principal amount if we were to breach these covenants and did not cure such breach within the cure periods (if any) specified in the respective indentures and senior secured revolving credit facility. Further, if we experience a change of control, as defined in the indentures or the senior secured revolving credit facility, we could be required to offer to purchase our debt securities at 101% of their principal amount or to repay all loans outstanding under the credit facility at their full principal amount plus any accrued interest or fees.
We cannot assure that we will be able to remain in compliance with these covenants in the future and, if we fail to comply, we cannot guarantee that we will be able to obtain waivers from the appropriate parties and/or amend the covenants. In addition, the terms of any future indebtedness could include more restrictive covenants than our current covenants. Failing to comply with these covenants could have a material adverse effect on our business and financial condition.
The value of our common stock may be diluted if we need additional funds in the future.
In the future, we may need to raise additional funds via the issuance and sale of our debt and/or equity instruments, which we may not be able to conduct on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital needs and our plans for the growth of our business. In addition, if funds are available, the issuance of equity securities could significantly dilute the value of our shares of our common stock and cause the market price of our common stock to fall. We have the ability to issue a significant number of shares of stock in future transactions, which would substantially dilute existing stockholders, without seeking further stockholder approval.
In recent periods, the global financial markets were in turmoil and the equity and credit markets experienced extreme volatility, which caused already weak economic conditions to worsen. Continued turmoil in the global financial markets could further restrict our access to the equity and debt markets.


20


The market price of our common stock may continue to be volatile.
From January 1, 2012 through December 31, 2015, the price per share of our common stock ranged from a low of $7.08 to a high of $31.48. The market price of our common stock has been, and is likely to continue to be, highly volatile and subject to wide fluctuations. Among the factors that may affect our stock price are the following:
speculation in the investment community or the press about, or actual changes in, our competitive position, organizational structure, executive team, operations, financial condition, financial reporting and results, or strategic transactions;
the announcement of new products, services, acquisitions, or dispositions by us or our competitors; and
increases or decreases in revenues or earnings, changes in earnings estimates by the investment community, and variations between estimated financial results and actual financial results.
Changes in the stock market generally or as it concerns our industry may also affect our stock price. In the past, volatility in the market price of a company’s securities has often led to securities class action litigation. Such litigation could result in substantial costs to us and divert our attention and resources, which could harm our business. We have been a party to litigation related to the decline in the market price of our stock in the past and such litigation could occur again in the future. Declines in the market price of our common stock or failure of the market price to increase could also harm our ability to retain key employees, reduce our access to capital, impact our ability to utilize deferred tax assets in the event of another ownership change and otherwise harm our business.
We have provisions in our organizational documents that may discourage takeover attempts.
Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a third party from acquiring control of us in a merger, acquisition or similar transaction that a stockholder may consider favorable. Such provisions include:
authorization for the issuance of "blank check" preferred stock;
the prohibition of cumulative voting in the election of directors;
a super-majority voting requirement to effect business combinations and certain amendments to our certificate of incorporation and bylaws;
limits on the persons who may call special meetings of stockholders;
the prohibition of stockholder action by written consent; and
advance notice requirements for nominations to the Board or for proposing matters that can be acted on by stockholders at stockholder meetings.
In addition, certain provisions of our stock incentive plans, management retention and employment agreements (including severance payments and stock option acceleration), our senior secured credit facility, certain provisions of Delaware law and certain provisions of the indentures governing certain series of our debt securities that would require us to offer to purchase such securities at a premium in the event of certain changes in our ownership may also discourage, delay or prevent someone from acquiring or merging with us, which could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

21


ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
ITEM 2.    PROPERTIES
A summary of our significant locations at December 31, 2015 is shown in the following table. Square footage amounts are net of space that has been sublet or is part of a facility restructuring. 
Location
Approximate Square Footage
Alpharetta, Georgia
260,000
Jersey City, New Jersey
109,000
Arlington, Virginia
102,000
Sandy, Utah
66,000
Menlo Park, California
63,000
New York, New York
52,000
All facilities are leased at December 31, 2015. All of our facilities are used by either our trading and investing or balance sheet management segments, in addition to the corporate/other category. All other leased facilities with space of less than 25,000 square feet are not listed by location. In addition to the significant facilities above, we also lease all 30 regional branches, ranging in space from approximately 2,500 to 8,000 square feet.
ITEM 3.    LEGAL PROCEEDINGS
Information in response to this item can be found under the heading "Legal Matters" in Note 19—Commitments, Contingencies and Other Regulatory Matters to Part II. Item 8. Financial Statements and Supplementary Data in this Annual Report and is incorporated by reference into this item.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

22


PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the NASDAQ Stock Market under the ticker symbol ETFC.
Price Range of Common Stock
The following table shows the high and low intraday sale prices of our common stock as reported by the NASDAQ for the periods indicated: 
 
2015
 
2014
 
High
 
Low
 
High
 
Low
 
 
 
 
 
 
 
 
First Quarter
$
28.67

 
$
21.01

 
$
25.58

 
$
18.86

Second Quarter
$
31.48

 
$
27.24

 
$
23.87

 
$
19.24

Third Quarter
$
30.66

 
$
22.66

 
$
24.57

 
$
20.13

Fourth Quarter
$
30.98

 
$
24.55

 
$
24.58

 
$
18.20

The closing sale price of our common stock as reported on the NASDAQ on February 19, 2016 was $22.49 per share. At that date, there were 738 holders of record of our common stock.
Dividends
We have never declared or paid cash dividends on our common stock and have no current plans to do so in the future. Our ability to pay dividends on our common stock may be restricted by the terms of our current or future indebtedness.
Share Repurchases
The table below shows the timing and impact of our share repurchases during the three months ended December 31, 2015 (dollars in millions, except per share amounts):
Period
 
Total Number of Shares Purchased(1)
 
Average Price Paid per Share(2)
 
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)
October 1, 2015 - October 31, 2015
 
1,194

 
$
26.63

 

 
$

November 1, 2015 - November 30, 2015
 
650,415

 
$
30.26

 
650,000

 
$
780.3

December 1, 2015 - December 31, 2015
 
1,014,526

 
$
30.00

 
1,009,971

 
$
750.0

Total
 
1,666,135

 
$
30.10

 
1,659,971

 
$
750.0

(1)
Includes 6,164 shares withheld 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.

23



Performance Graph
The following performance graph shows the cumulative total return to a holder of the Company’s common stock, assuming dividend reinvestment, compared with the cumulative total return, assuming dividend reinvestment, of the Standard & Poor ("S&P") 500 Index and the Dow Jones US Financials Index during the period from December 31, 2010 through December 31, 2015.
 
12/10
 
12/11
 
12/12
 
12/13
 
12/14
 
12/15
E*TRADE Financial Corporation
100.00

 
49.75

 
55.94

 
122.75

 
151.59

 
185.25

S&P 500 Index
100.00

 
102.11

 
118.45

 
156.82

 
178.29

 
180.75

Dow Jones US Financials Index
100.00

 
87.16

 
110.56

 
148.39

 
170.04

 
170.19



24


ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in millions, shares in thousands, except per share amounts):
 
Year Ended December 31,
 
Variance
 
2015
 
2014
 
2013
 
2012
 
2011
 
2015 vs. 2014
Results of Operations:
 
 
 
 
 
 
 
 
 
 
 
Net operating interest income
$
1,086

 
$
1,074

 
$
969

 
$
1,076

 
$
1,213

 
1%
Total net revenue
$
1,428

 
$
1,814

 
$
1,723

 
$
1,900

 
$
2,037

 
(21)%
Provision (benefit) for loan losses
$
(40
)
 
$
36

 
$
143

 
$
355

 
$
441

 
(211)%
Net income (loss)
$
268

 
$
293

 
$
86

 
$
(113
)
 
$
157

 
(9)%
Basic net earnings (loss) per share
$
0.92

 
$
1.02

 
$
0.30

 
$
(0.39
)
 
$
0.59

 
(10)%
Diluted net earnings (loss) per share
$
0.91

 
$
1.00

 
$
0.29

 
$
(0.39
)
 
$
0.54

 
(9)%
Weighted average shares—basic
290,762

 
288,705

 
286,991

 
285,748

 
267,291

 
1%
Weighted average shares—diluted
295,011

 
294,103

 
292,589

 
285,748

 
289,822

 
—%
(Dollars in millions):
 
December 31,
 
Variance
 
2015
 
2014
 
2013
 
2012
 
2011
 
2015 vs. 2014
Financial Condition:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
$
12,589

 
$
12,388

 
$
13,592

 
$
13,443

 
$
15,651

 
2%
Held-to-maturity securities
$
13,013

 
$
12,248

 
$
10,181

 
$
9,540

 
$
6,080

 
6%
Margin receivables
$
7,398

 
$
7,675

 
$
6,353

 
$
5,804

 
$
4,826

 
(4)%
Loans receivable, net
$
4,613

 
$
5,979

 
$
8,123

 
$
10,099

 
$
12,333

 
(23)%
Total assets
$
45,427

 
$
45,530

 
$
46,280

 
$
47,387

 
$
47,940

 
—%
Deposits
$
29,445

 
$
24,890

 
$
25,971

 
$
28,393

 
$
26,460

 
18%
Corporate debt
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing
$
989

 
$
1,328

 
$
1,726

 
$
1,722

 
$
1,451

 
(26)%
Non-interest-bearing
$
8

 
$
38

 
$
42

 
$
43

 
$
43

 
(79)%
Shareholders’ equity
$
5,799

 
$
5,375

 
$
4,856

 
$
4,904

 
$
4,928

 
8%
The selected consolidated financial data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.

25


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document.
GLOSSARY OF TERMS
In analyzing and discussing our business, we utilize certain metrics, ratios and other terms that are defined in the Glossary of Terms, which is located at the end of this item.
OVERVIEW
We are a financial services company that, through our subsidiaries, provides a full suite of online brokerage, investing and related banking solutions at a competitive price. We provide these services to customers primarily through our digital platforms and through our network of industry-licensed customer service representatives and financial consultants. We also operate a bank with the primary purpose of maximizing the value of deposits generated through our brokerage business.
Our net revenue is generated primarily from our brokerage and banking activities and the resulting net operating interest income, commissions and fees and service charges. Net operating interest income is largely impacted by the size of our balance sheet, our balance sheet mix, and average yields on our assets and liabilities. Net operating interest income is primarily driven from interest earned on the investment of deposits and customer payables into investment securities, real estate loans and margin receivables, less interest paid on interest-bearing liabilities, including deposits and customer payables as well as other borrowings. Commissions revenue is generated by customer trades and is largely impacted by trade volume (DARTs) and commission rates. Fees and service charges revenue is mainly impacted by order flow revenue and fee-generating customer assets. Our net revenue is offset by operating expenses, the largest being compensation and benefits, advertising and market development and professional services.
Key Factors Affecting Financial Performance
Our financial performance is affected by a number of factors outside of our control, including:
customer demand for financial products and services;
weakness or strength of the residential real estate and credit markets;
performance, volume and volatility of the equity and capital markets;
customer perception of the financial strength of our franchise;
market demand and liquidity in the secondary market for mortgage loans and securities;
the level and volatility of interest rates;
our ability to move capital to our parent company from our subsidiaries subject to regulatory approvals or notifications; and
changes to the rules and regulations governing the financial services industry.
In addition to the items noted above, our success in the future will depend upon, among other things, our ability to execute on our business strategy. Refer to Item 1. Business for more information.

26


Management monitors a number of metrics in evaluating the Company’s performance. The most significant of these are shown in the table and discussed in the text below: 
 
As of or For the Year Ended December 31,
Variance
 
2015
 
2014
 
2013
 
2015 vs. 2014
Customer Activity Metrics:
 
 
 
 
 
 
 
Daily average revenue trades ("DARTs")
155,470

 
168,474

 
150,743

 
(8
)%
Average commission per trade
$
10.86

 
$
10.81

 
$
11.13

 
 %
Margin receivables (dollars in billions)
$
7.4

 
$
7.7

 
$
6.4

 
(4
)%
End of period brokerage accounts(1)
3,213,541

 
3,143,923

 
2,998,059

 
2
 %
Net new brokerage accounts(1)
69,618

 
145,864

 
94,868

 
(52
)%
Brokerage account attrition rate(1)
9.7
%
 
8.7
%
 
8.8
%
 
1
 %
Customer assets (dollars in billions)
$
287.9

 
$
290.3

 
$
260.8

 
(1
)%
Net new brokerage assets (dollars in billions)
$
9.3

 
$
10.9

 
$
10.4

 
(15
)%
Brokerage related cash (dollars in billions)
$
41.7

 
$
41.1

 
$
39.7

 
1
 %
Company Metrics:
 
 
 
 
 
 
 
Corporate cash (dollars in millions)(2)
$
447

 
$
233

 
$
415

 
92
 %
E*TRADE Financial Tier 1 leverage ratio(3)
9.0
%
 
8.1
%
 
6.7
%
 
0.9
 %
E*TRADE Bank Tier 1 leverage ratio(3)(4)
9.7
%
 
10.6
%
 
9.5
%
 
(0.9
)%
Special mention loan delinquencies (dollars in millions)
$
130

 
$
155

 
$
271

 
(16
)%
Allowance for loan losses (dollars in millions)
$
353

 
$
404

 
$
453

 
(13
)%
Enterprise net interest spread
2.64
%
 
2.55
%
 
2.33
%
 
0.09
 %
Enterprise interest-earning assets (average dollars in billions)
$
40.8

 
$
41.4

 
$
40.9

 
(1
)%
Total employees (period end)
3,421

 
3,221

 
3,009

 
6
 %
(1)
Net new brokerage accounts and end of period brokerage accounts were impacted by the closure of 23,150 accounts related to the shutdown of the Company's global trading platform and the closure of 3,484 accounts related to the escheatment of unclaimed property during the year ended December 31, 2015. Excluding the impact of these items, brokerage account attrition rate was 8.9% for the year ended December 31, 2015.
(2)
See Liquidity and Capital Resources for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
(3)
Beginning in the first quarter of 2015, E*TRADE Financial and E*TRADE Bank calculate regulatory capital under the Basel III framework using the Standardized Approach, subject to transition provisions. Prior to the first quarter of 2015, the risk-based capital guidelines that applied to E*TRADE Bank were based upon the 1988 capital accords of the Basel Committee on Banking Supervision ("BCBS"), a committee of central banks and bank supervisors, as implemented by the U.S. Federal banking agencies, including the OCC, commonly known as Basel I. As a savings and loan holding company, E*TRADE Financial was not previously subject to specific statutory capital requirements. Therefore, E*TRADE Financial's Tier 1 leverage ratio at December 31, 2014 and December 31, 2013 were non-GAAP measures and were calculated based on the Federal Reserve’s well-capitalized requirements then applicable to bank holding companies. See Liquidity and Capital Resources for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
(4)
E*TRADE Bank excludes E*TRADE Securities as of February 1, 2015 and E*TRADE Clearing as of July 1, 2015.
Customer Activity Metrics
DARTs are the predominant driver of commissions revenue from our customers.
Average commission per trade is an indicator of changes in our customer mix, product mix and/or product pricing.
Margin receivables represent credit extended to customers to finance their purchases of securities by borrowing against securities they own and are a key driver of net operating interest income.
End of period brokerage accounts, net new brokerage accounts and brokerage account attrition rate are indicators of our ability to attract and retain brokerage customers. The brokerage account attrition rate is calculated by dividing attriting brokerage accounts, which are gross new brokerage accounts less net new brokerage accounts, by total brokerage accounts at the previous period end.
Changes in customer assets are an indicator of the value of our relationship with the customer. An increase in customer assets generally indicates that the use of our products and services by existing

27


and new customers is expanding. Changes in this metric are also driven by changes in the valuations of our customers’ underlying securities.
Net new brokerage assets are total inflows to all new and existing brokerage accounts less total outflows from all closed and existing brokerage accounts and are a general indicator of the use of our products and services by new and existing brokerage customers.
Brokerage related cash is an indicator of the level of engagement with our brokerage customers and is a key driver of net operating interest income as well as fees and service charges revenue, which includes fees earned on customer assets held by third parties outside the Company.
Company Metrics
Corporate cash is an indicator of the liquidity at the parent company. It is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. See Liquidity and Capital Resources for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
Tier 1 leverage ratio is an indication of capital adequacy for E*TRADE Financial and E*TRADE Bank. Tier 1 leverage ratio is Tier 1 capital divided by adjusted average total assets for leverage capital purposes. See Liquidity and Capital Resources for additional information, including the calculation of regulatory capital ratios and a reconciliation of previously non-GAAP capital ratios to the comparable GAAP measures.
Special mention loan delinquencies are loans 30-89 days past due and are an indicator of the expected trend for charge-offs in future periods as these loans have a greater propensity to migrate into nonaccrual status and ultimately be charged-off.
Allowance for loan losses is an estimate of probable losses inherent in the loan portfolio as of the balance sheet date, as well as the forecasted losses, including economic concessions to borrowers, over the estimated remaining life of loans modified as troubled debt restructurings ("TDR").
Enterprise interest-earning assets, in conjunction with our enterprise net interest spread, are indicators of our ability to generate net operating interest income.
Significant Events
Authorized the repurchase of up to $800 million of shares of our common stock
In November 2015, we announced that our Board of Directors authorized the repurchase of up to $800 million of shares of our common stock through March 31, 2017. The timing and exact amount of any common stock repurchases will depend on various factors, including market conditions and our capital position. As of December 31, 2015, we have repurchased approximately 1.7 million shares of common stock at an average price of $30.10 for a total of approximately $50 million. As of February 19, 2016, we have subsequently repurchased an additional 9.4 million shares of common stock at an average price of $23.03. Under this publicly announced plan, we have repurchased a total of 11.1 million shares of common stock for a total of $268 million.
Received Regulatory Approval to Operate E*TRADE Bank at a 8.0% Tier 1 Leverage Ratio and Moved Broker-Dealers from under E*TRADE Bank
We received regulatory approval to operate E*TRADE Bank at a 8.0% Tier 1 leverage ratio beginning early 2016, a full year ahead of expectations, reflecting significant progress on our capital plan.
We received regulatory approval to move our broker-dealers, E*TRADE Securities and E*TRADE Clearing, out from under E*TRADE Bank. This new organizational structure provides increased capital flexibility as it enables us to dividend excess regulatory capital at our broker-dealers to the parent, subject to regulatory notification.

28


E*TRADE Securities was moved out from under E*TRADE Bank in February 2015. Subsequent to the move, E*TRADE Securities paid dividends to the parent company of $565 million during 2015 and $24 million in January 2016.
E*TRADE Clearing was moved out from under E*TRADE Bank in July 2015. Prior to this move, E*TRADE Bank contributed $150 million of capital to E*TRADE Clearing to enhance its capital and liquidity position. Based on E*TRADE Clearing’s current capital and liquidity position, E*TRADE Clearing paid a dividend to the parent company of $124 million in February 2016.
$281 Million in Dividends Issued from E*TRADE Bank to the Parent Company
We received approval from our regulators for $281 million in dividends from E*TRADE Bank to the parent company in 2015, totaling $756 million in quarterly dividends from E*TRADE Bank to the parent company since the third quarter of 2013 and is reflective of progress on our capital plan and our significantly improved financial position and regulatory standing.
New Sweep Deposit Platform
We implemented a new sweep deposit platform which allows us to more efficiently manage our balance sheet size. During 2015, we utilized this platform to direct a net total of $4.7 billion of customer assets held at third party institutions back onto our balance sheet.
Terminated $4.4 billion of Legacy Wholesale Funding Obligations
We terminated $4.4 billion of legacy wholesale funding obligations, including repurchase agreements and FHLB advances, in September 2015. In connection with the termination, we recorded a pre-tax charge of $413 million during the third quarter of 2015. We expect the termination of the legacy wholesale funding obligations to significantly reduce our funding costs, thereby improving our ability to generate net income.
E*TRADE Clearing Established a $345 Million Credit Facility
E*TRADE Clearing entered into a new $345 million senior unsecured revolving credit facility as an additional source of liquidity for its operations in June 2015, bringing its total external funding available to approximately $1 billion as of December 31, 2015.
Generated a $220 Million Income Tax Benefit from Settlement of Internal Revenue Service ("IRS") Examination
In May 2015, we settled the IRS examination of our 2007, 2009 and 2010 federal tax returns. The settlement resulted in the recognition of a $220 million income tax benefit in the second quarter of 2015. The settlement also resulted in an increase in our deferred tax assets.
Eliminated $340 Million of Corporate Debt and increased the Credit Facility at the Parent Company by $50 Million
In March 2015, we issued $460 million of 45/8% Senior Notes due 2023. We used the net proceeds together with $432 million of existing corporate cash to redeem $800 million of 6 3/8% Senior Notes due 2019, reducing our total corporate debt by $340 million to $1 billion and resulting in a $73 million loss on early extinguishment of debt. These transactions reduced our annual debt service costs from $80 million to $50 million and extended the maturity profile with no interest-bearing corporate debt maturing until 2022.
We increased our senior secured revolving credit facility by $50 million to $250 million in March 2015, enhancing liquidity at the parent company.
Enhancements to Our Trading and Investing Products and Services
We enhanced our digital storefront and core platforms, including revamped welcome, account overview, and retirement pages, and our tax center on our website, as well as introduced the TipRanks tool to our platform.

29


We made a number of upgrades on our active trader platform, E*TRADE Pro, including a new options analyzer, new margin analyzer, and new user orientation.
We launched several mobile enhancements, including the addition of conditional orders, multi-leg options and a new mutual fund trading experience on tablet. We also added several new technologies available on iOS, including home screen support, Apple Pay, and an Apple Watch app.
Third Party Recognition
Barron’s rated us 4 out of 5 stars in their annual online broker survey, scoring high marks in research amenities and customer service and education.
Stockbrokers.com gave us three first place awards in their 2015 Online Broker Review: #1 Smartphone App, #1 Client Dashboard and Best New Tool for E*TRADE Browser Trading. In the same review, we also earned five best-in-class ratings for Offering of Investments, Investor Education, Research, Mobile Trading, and New Investors.
Equity Edge Online, our corporate stock plan administration and reporting platform, was rated #1 in Loyalty and Overall Satisfaction by Group Five for the fourth year in a row.
EARNINGS OVERVIEW
2015 Compared to 2014
We generated net income of $268 million, or $0.91 per diluted share, on total net revenue of $1.4 billion for the year ended December 31, 2015. During 2015, we terminated $4.4 billion of legacy wholesale funding obligations. We expect this action to significantly reduce our funding costs, thereby improving our ability to generate net income. In connection with this termination, we recorded a pre-tax charge of $413 million on our consolidated statement of income, including $43 million of losses on early extinguishment of debt, and $370 million of losses that were reclassified from accumulated comprehensive loss related to cash flow hedges and included in the gains (losses) on securities and other line item. Net operating interest income increased 1% to $1.1 billion for the year ended December 31, 2015 compared to the same period in 2014. Commissions, fees and service charges and other revenue decreased 3% to $673 million for the year ended December 31, 2015 compared to the same period in 2014. Provision (benefit) for loan losses was $(40) million for the year ended December 31, 2015 compared to $36 million for the same period in 2014. Total operating expenses increased 5% to $1.2 billion for the year ended December 31, 2015 compared to the same period in 2014.
The following sections describe in detail the changes in key operating factors and other changes and events that affected net revenue, provision (benefit) for loan losses, operating expense, other income (expense) and income tax expense (benefit).
Revenue
The components of revenue and the resulting variances are as follows (dollars in millions):
 
Year Ended December 31,
 
Variance
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
Net operating interest income
$
1,086

 
$
1,074

 
$
12

 
1
 %
Commissions
424

 
456

 
(32
)
 
(7
)%
Fees and service charges
210

 
200

 
10

 
5
 %
Principal transactions

 
10

 
(10
)
 
(100
)%
Gains (losses) on securities and other
(331
)
 
36

 
(367
)
 
*

Other revenues
39

 
38

 
1

 
3
 %
Total non-interest income (loss)
342

 
740

 
(398
)
 
(54
)%
Total net revenue
$
1,428

 
$
1,814

 
$
(386
)
 
(21
)%
 
*
Percentage not meaningful.

30


Net Operating Interest Income
Net operating interest income increased 1% to $1.1 billion for the year ended December 31, 2015 compared to the same period in 2014. Net operating interest income is earned primarily through investing deposits and customer payables in assets including: available-for-sale securities, held-to-maturity securities, margin receivables and real estate loans.     
The following table presents enterprise average balance sheet data and enterprise income and expense data for our operations, as well as the related net interest spread, yields and rates prepared on the basis required by the SEC’s Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" (dollars in millions): 
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/
Cost
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/
Cost
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/
Cost
Enterprise interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans(1)
$
5,651

 
$
230

 
4.06
%
 
$
7,298

 
$
297

 
4.07
%
 
$
9,569

 
$
395

 
4.12
%
Available-for-sale securities
12,541

 
245

 
1.95
%
 
12,761

 
289

 
2.26
%
 
13,074

 
280

 
2.14
%
Held-to-maturity securities
12,201

 
346

 
2.84
%
 
11,288

 
328

 
2.90
%
 
9,772

 
255

 
2.61
%
Margin receivables
7,884

 
276

 
3.50
%
 
7,446

 
264

 
3.55
%
 
5,929

 
224

 
3.78
%
Cash and equivalents
1,572

 
3

 
0.19
%
 
1,279

 
2

 
0.15
%
 
1,434

 
3

 
0.20
%
Segregated cash
425

 
1

 
0.15
%
 
736

 
1

 
0.10
%
 
457

 

 
0.10
%
Securities borrowed and other
527

 
115

 
21.90
%
 
629

 
98

 
15.68
%
 
657

 
51

 
7.76
%
Total enterprise interest-earning assets
40,801

 
1,216

 
2.98
%
 
41,437

 
1,279

 
3.08
%
 
40,892

 
1,208

 
2.95
%
Non-operating interest-earning and non-interest earning assets(2)
4,668

 
 
 
 
 
4,383

 
 
 
 
 
4,624

 
 
 
 
Total assets
$
45,469

 
 
 
 
 
$
45,820

 
 
 
 
 
$
45,516

 
 
 
 
Enterprise interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
Sweep deposits
$
20,638

 
4

 
0.02
%
 
$
19,168

 
7

 
0.03
%
 
$
19,432

 
11

 
0.06
%
Complete savings deposits
3,534

 

 
0.01
%
 
4,009

 
1

 
0.01
%
 
$
4,582

 
1

 
0.01
%
Other money market and savings deposits
807

 

 
0.01
%
 
867

 

 
0.01
%
 
$
941

 

 
0.01
%
Checking deposits
1,127

 

 
0.03
%
 
1,069

 

 
0.03
%
 
$
1,007

 

 
0.03
%
Time deposits
43

 

 
0.38
%
 
58

 

 
0.55
%
 
$
81

 
1

 
1.11
%
Customer payables
6,435

 
5

 
0.07
%
 
6,417

 
8

 
0.13
%
 
5,494

 
9

 
0.15
%
Securities sold under agreements to repurchase(3)
2,490

 
69

 
2.76
%
 
3,993

 
123

 
3.07
%
 
4,466

 
148

 
3.32
%
FHLB advances and other borrowings(3)
1,010

 
48

 
4.73
%
 
1,288

 
65

 
5.05
%
 
1,291

 
68

 
5.29
%
Securities loaned and other
1,759

 
3

 
0.19
%
 
1,518

 

 
0.03
%
 
860

 

 
0.02
%
Total enterprise interest-bearing liabilities
37,843

 
129

 
0.34
%
 
38,387

 
204

 
0.53
%
 
38,154

 
238

 
0.62
%
Non-operating interest-bearing and non-interest bearing liabilities(4)
1,970

 
 
 
 
 
2,272

 
 
 
 
 
2,490

 
 
 
 
Total liabilities
39,813

 
 
 
 
 
40,659

 
 
 
 
 
40,644

 
 
 
 
Total shareholders’ equity
5,656

 
 
 
 
 
5,161

 
 
 
 
 
4,872

 
 
 
 
Total liabilities and shareholders’ equity
$
45,469

 
 
 
 
 
$
45,820

 
 
 
 
 
$
45,516

 
 
 
 
Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread(5)
$
2,958

 
$
1,087

 
2.64
%
 
$
3,050

 
$
1,075

 
2.55
%
 
$
2,738

 
$
970

 
2.33
%
(1)
Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual loans are recognized on a cash basis in operating interest income until it is doubtful that full payment will be collected, at which point payments are applied to principal.
(2)
Non-operating interest-earning and non-interest earning assets consist of property and equipment, net, goodwill, other intangibles, net and other assets that do not generate operating interest income. Some of these assets generate corporate interest income.
(3)
In September 2015, we terminated $4.4 billion of legacy wholesale funding obligations and recorded a pre-tax charge of $413 million on our consolidated statement of income.
(4)
Non-operating interest-bearing and non-interest bearing liabilities consist of corporate debt and other liabilities that do not generate operating interest expense. Some of these liabilities generate corporate interest expense.

31


(5)
Enterprise net interest spread represents the taxable equivalent rate earned on average enterprise interest-earning assets less the rate paid on average enterprise interest-bearing liabilities, excluding corporate interest-earning assets and liabilities. The taxable equivalent adjustment to reconcile to net operating interest income was $1 million for each of the years ended December 31, 2015, 2014 and 2013.
 
Year Ended December 31,
 
2015
 
2014
 
2013
Enterprise net interest:
 
 
 
 
 
Spread
2.64
%
 
2.55
%
 
2.33
%
Margin (net yield on interest-earning assets)
2.66
%
 
2.59
%
 
2.37
%
Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities
107.82
%
 
107.95
%
 
107.18
%
Return on average:
 
 
 
 
 
Total assets
0.59
%
 
0.64
%
 
0.19
%
Total shareholders’ equity
4.75
%
 
5.69
%
 
1.77
%
Average total shareholders’ equity to average total assets
12.44
%
 
11.26
%
 
10.70
%
Average enterprise interest-earning assets decreased 2% to $40.8 billion for the year ended December 31, 2015 compared to the same period in 2014. The fluctuation in enterprise interest-earning assets is driven primarily by changes in enterprise interest-bearing liabilities, specifically deposits and customer payables. The increase in funding from these two liabilities for the year ended December 31, 2015 was more than offset by the decrease in interest-earning assets mainly due to the sale of securities and cash used to terminate $4.4 billion of legacy wholesale funding obligations during the third quarter of 2015.
Average enterprise interest-bearing liabilities decreased 1% to $37.8 billion for the year ended December 31, 2015 compared to the same period in 2014. The decrease was primarily due to the termination of our legacy wholesale funding obligations during the third quarter of 2015, partially offset by increases in deposits.
As of December 31, 2015, $11.2 billion of our customers' assets were held at third party institutions. Approximately 60% of these off-balance sheet assets resulted from our deleveraging efforts completed in prior periods, with the remaining 40% primarily held in municipal funds and other customer assets held by third parties that we do not have the ability to bring back on our balance sheet. We estimate the impact of our deleveraging efforts on net operating interest income at December 31, 2015 to be approximately 135 basis points based on the estimated current re-investment rates on these assets, less approximately 7 basis points of cost associated with holding these assets on our balance sheet, primarily FDIC insurance premiums. We consider our deleveraging initiatives to be complete and we maintain the ability to transfer the majority of these customer assets to our balance sheet with notification to the third party institutions and customer consent, as appropriate. During 2015, we transferred a net total of $4.7 billion of customer assets held by third parties to our balance sheet and we intend to continue to do so until we reach our targeted consolidated balance sheet size during the second quarter of 2016. For additional information on customer assets held by third parties, see the Balance Sheet Overview—Deposits section.
Enterprise net interest spread increased by 9 basis points to 2.64% for the year ended December 31, 2015 compared to the same period in 2014. Enterprise net interest spread is driven by changes in average balances and average interest rates earned or paid on those balances. The increase was primarily due to lower borrowing costs resulting from the termination of $4.4 billion of legacy wholesale funding obligations during the third quarter of 2015. In addition, for the year ended December 31, 2015, revenue earned from our margin and securities lending activities increased. These increases were partially offset by the continued run-off of our legacy loan portfolio along with lower rates earned on investment securities. Enterprise net interest spread may further fluctuate based on the size and mix of the balance sheet, as well as the impact from the interest rate environment.
Commissions
Commissions revenue decreased 7% to $424 million for the year ended December 31, 2015 compared to the same period in 2014. The main factors that affect commissions revenue are DARTs, average commission per trade and the number of trading days.
DART volume decreased 8% to 155,470 for the year ended December 31, 2015 compared to the same period in 2014. Option-related DARTs as a percentage of total DARTs represented 23% of trading volume for year ended December 31, 2015, compared to 22% in 2014. DARTs via mobile applications as a percentage of total DARTs

32


represented 15% of trading volume for the year ended December 31, 2015 compared to 11% for the same period in 2014.
Average commission per trade increased slightly to $10.86 for the year ended December 31, 2015 from $10.81 for the same period in 2014. Average commission per trade is impacted by customer mix and the different commission rates on various trade types (e.g. equities, options, fixed income, stock plan, exchange-traded funds, mutual funds, forex and cross border).
Fees and Service Charges
Fees and service charges increased 5% to $210 million for the year ended December 31, 2015 compared to the same period in 2014. The table below shows the components of fees and service charges and the resulting variances (dollars in millions):
 
Year Ended December 31,
 
Variance
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
Order flow revenue
$
85

 
$
92

 
$
(7
)
 
(8
)%
Mutual fund service fees
27

 
23

 
4

 
17
 %
Advisor management fees
27

 
23

 
4

 
17
 %
Foreign exchange revenue
15

 
16

 
(1
)
 
(6
)%
Reorganization fees
12

 
8

 
4

 
50
 %
Money market funds and sweep deposits revenue(1)
23

 
14

 
9

 
64
 %
Other fees and service charges
21

 
24

 
(3
)
 
(13
)%
Total fees and service charges
$
210

 
$
200

 
$
10

 
5
 %
(1)
Includes revenue earned on average customer assets held by third parties outside the Company, including money market funds and sweep deposit accounts at unaffiliated financial institutions. Fees earned on these customer assets are based on the federal funds rate or LIBOR plus a negotiated spread or other contractual arrangement with the third party institutions.
The increase in fees and services charges for the year ended December 31, 2015, compared to the same period in 2014, was primarily driven by increased money market funds and sweep deposits revenue due to increased rates earned on sweep deposit accounts and on customer assets in money market funds held by third parties.
Principal Transactions
There was no principal transactions revenue for the year ended December 31, 2015, compared to $10 million for the same period in 2014. Principal transactions were derived from our market making business in which we acted as a market-maker for our brokerage customers’ orders as well as orders from third party customers. On February 10, 2014, we completed the sale of the market making business and no longer generate principal transactions revenue.

33


Gains (Losses) on Securities and Other
The table below shows the components of gains (losses) on securities and other and the resulting variances (dollars in millions):
 
Year Ended December 31,
 
Variance
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
Reclassification of deferred losses on cash flow hedges
$
(370
)
 
$

 
$
(370
)
 
*

Hedge ineffectiveness
(1
)
 
(10
)
 
9

 
*

Gains on available-for-sale securities, net
38

 
42

 
(4
)
 
(10
)%
Gains (losses) on loans, net
2

 
4

 
(2
)
 
(50
)%
Gains (losses) on securities and other
$
(331
)
 
$
36

 
$
(367
)
 
*

*
Percentage not meaningful.
Gains (losses) on securities and other were $(331) million for the year ended December 31, 2015 compared to $36 million for the same period in 2014. The activity for the year ended December 31, 2015 included $370 million of losses reclassified from accumulated comprehensive loss related to cash flow hedges as a result of the termination of legacy wholesale funding obligations. The activity for the year ended December 31, 2014 included a gain of $7 million on the sale of one- to four-family loans modified as TDRs and a gain of $6 million recognized on the sale of our remaining available-for-sale non-agency CMOs.
Provision (Benefit) for Loan Losses
We recognized a benefit for loan losses of $40 million for the year ended December 31, 2015 compared to a provision of $36 million for the same period in 2014. The benefit for loan losses reflected a decrease in allowance for loan losses due to continued improvement in economic conditions, recoveries of previous charge-offs and loan portfolio run-off, offset by an increase in allowance due to enhancements to our modeling practices for the allowance for loan losses during the year ended December 31, 2015. For additional information on management's estimate of the allowance for loan losses, see Summary of Critical Accounting Policies and Estimates. The timing and magnitude of the provision (benefit) for loan losses is affected by many factors that could result in variability, particularly as mortgage loans reach the end of their interest-only period.

34


Operating Expense
The components of operating expense and the resulting variances are as follows (dollars in millions):
 
Year Ended December 31,
 
Variance
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
Compensation and benefits
$
466

 
$
412

 
$
54

 
13
 %
Advertising and market development
124

 
120

 
4

 
3
 %
Clearing and servicing
95

 
94

 
1

 
1
 %
FDIC insurance premiums
41

 
79

 
(38
)
 
(48
)%
Professional services
103

 
112

 
(9
)
 
(8
)%
Occupancy and equipment
88

 
79

 
9

 
11
 %
Communications
90

 
71

 
19

 
27
 %
Depreciation and amortization
81

 
78

 
3

 
4
 %
Amortization of other intangibles
20

 
22

 
(2
)
 
(9
)%
Restructuring and other exit activities
17

 
8

 
9

 
113
 %
Other operating expenses
82

 
70

 
12

 
17
 %
Total operating expense
$
1,207

 
$
1,145

 
$
62

 
5
 %
Compensation and Benefits
Compensation and benefits increased 13% to $466 million for the year ended December 31, 2015 compared to the same periods in 2014. The increase was primarily due to increased salaries expense driven by an increase in headcount of 6% and increased incentive compensation, compared to the same period in 2014. Compensation and benefits also included $6 million of executive severance costs during the year ended December 31, 2015.
FDIC Insurance Premiums
FDIC insurance premiums decreased 48% to $41 million for the year ended December 31, 2015 compared to the same period in 2014. The decrease was primarily driven by reduced rate assessments due to continued improvement and quality of our balance sheet, improving capital ratios and overall risk profile, compared to the same periods in 2014.  These drivers and the resulting decrease in FDIC insurance premiums are indications of the important progress made on our capital plan.
Communications
Communications expense increased 27% to $90 million for the year ended December 31, 2015 compared to the same period in 2014. The increase was primarily driven by third party contract charges of $12 million recognized in 2015.
Restructuring and other exit activities
Restructuring and other exit activities expense increased 113% to $17 million for the year ended December 31, 2015 compared to the same period in 2014. This line item includes costs related to both department and business reorganizations, such as the shutdown of certain of our international operations. The increase was primarily driven by $6 million executive severance for an eliminated position during the year ended December 31, 2015. In addition, the prior period included a $4 million gain on the sale of the market making business, which was completed in February 2014.

35


Other Operating Expenses
Other operating expenses increased 17% to $82 million for the year ended December 31, 2015 compared to the same period in 2014. The increase during the year ended December 31, 2015 was primarily driven by a $9 million expense related to a third party contract amendment executed during 2015.
Other Income (Expense)
Other income (expense) was a net expense of $170 million and $181 million for the years ended December 31, 2015 and 2014, respectively, as shown in the following table (dollars in millions):
 
Year Ended December 31,
 
Variance
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
Corporate interest expense
$
(65
)
 
$
(113
)
 
$
48

 
(42
)%
Losses on early extinguishment of debt
(112
)
 
(71
)
 
(41
)
 
58
 %
Other
7

 
3

 
4

 
133
 %
Total other income (expense)
$
(170
)
 
$
(181
)
 
$
11

 
(6
)%
Corporate interest expense was $65 million for year ended December 31, 2015 compared to $113 million for the same period in 2014. The decrease in corporate interest expense was driven by corporate debt refinances and corporate debt reductions which have reduced our annual debt service cost. See Note 13—Corporate Debt in Item 8. Financial Statements and Supplementary Data for additional information on the debt refinance transactions executed during the periods presented.
Losses on early extinguishment of debt was $112 million for the year ended December 31, 2015. This amount includes a loss of $43 million resulting from our termination of $4.4 billion of legacy wholesale funding obligations during 2015, offset by a $4 million net gain resulting from the redemption of $19 million of TRUPs during 2015. In addition, during the years ended December 31, 2015 and 2014, we recorded losses on early extinguishment of debt of $73 million and $59 million, respectively, as a result of the corporate debt refinance transactions referenced above. During the year ended December 31, 2014, we also recorded a $12 million loss on early extinguishment of debt as a result of the early extinguishment of $100 million in repurchase agreements.
Income Tax Expense (Benefit)
Income tax expense (benefit) was $(177) million and $159 million for the year ended December 31, 2015 and December 31, 2014, respectively. The effective tax rate was (195)% for the year ended December 31, 2015, compared to 35% in 2014.
During 2015, we settled the IRS examination of our 2007, 2009 and 2010 federal tax returns resulting in the recognition of a $220 million income tax benefit. The income tax benefit resulted from the release of related reserves for uncertain tax positions, the majority of which increased our deferred tax assets. See Balance Sheet Overview for further discussion on deferred tax assets at December 31, 2015. During 2009, we incurred a loss on the exchange of $1.7 billion interest-bearing corporate debt for non-interest-bearing convertible debentures. The uncertain tax positions were primarily related to whether certain components of that loss were considered deductible or non-deductible for tax purposes. Excluding the impact of the settled IRS examination, the effective tax rate would have been 47% for the year ended December 31, 2015, respectively, calculated in the following table (dollars in millions):
 
Twelve Months Ended December 31, 2015
 
Pre-tax Income
 
Tax Expense (Benefit)
 
Tax Rate
Income taxes and tax rate before impact of settled IRS examination(1)
$
91

 
$
43

 
47
 %
Impact of settled IRS examination

 
(220
)
 
(242
)%
Income taxes and tax rate as reported
$
91

 
$
(177
)
 
(195
)%
(1)
Income taxes and tax rate before impact of settled IRS examination includes the impact of non-deductible items. See Note 14—Income Taxes in Item 8. Financial Statements and Supplementary Data for additional information on the effective tax rate reconciliation.

36


Valuation Allowance
Our net deferred tax asset was $1.0 billion and $951 million at December 31, 2015 and 2014, respectively. As of December 31, 2015, we did not establish a valuation allowance against our federal deferred tax assets as we believe that it is more likely than not that all of these assets will be realized. Certain of the deferred tax assets result from net operating losses that are subject to Section 382 annual use limitations. We expect these deferred tax assets subject to limitations to be fully utilized before expiration and therefore, no valuation allowance against these assets has been established. We expect to utilize the majority of the existing federal deferred tax assets within the next three years.
We maintain a valuation allowance for certain of our state deferred tax assets as we have concluded that it is more likely than not that they will not be realized. At December 31, 2015, we had total state deferred tax assets, net of federal benefit, of approximately $177 million related to our state net operating loss carryforwards and temporary differences with a valuation allowance of $65 million against such deferred tax assets.
2014 Compared to 2013
We generated net income of $293 million, or $1.00 per diluted share, on total net revenue of $1.8 billion for the year ended December 31, 2014. Net operating interest income increased 11% to $1.1 billion for the year ended December 31, 2014 compared to 2013, which was driven primarily by the size and mix of the balance sheet as well as an increase in net interest spread. Commissions, fees and service charges and other revenue increased 11% to $694 million for the year ended December 31, 2014, compared to 2013, which was driven primarily by increased order flow revenue and advisor management fees, in addition to increased trading activity. The increases were partially offset by a decrease in principal transactions following our exit of the market making business, and a decrease in gains (losses) on securities and other for the year ended December 31, 2014 when compared to 2013.
Provision for loan losses decreased 75% to $36 million for the year ended December 31, 2014 compared to 2013. The decrease was driven primarily by improving economic conditions, as evidenced by the lower levels of delinquent loans in the one- to four-family and home equity loan portfolios, lower net charge-offs, home price improvement and loan portfolio run-off. Total operating expenses decreased 10% to $1.1 billion for the year ended December 31, 2014, compared to 2013, which was driven primarily by $142 million in impairment of goodwill that was recognized in 2013 which increased operating expenses for the year ended December 31, 2013.
The following sections describe in detail the changes in key operating factors and other changes and events that affected net revenue, provision for loan losses, operating expense, other income (expense) and income tax expense.
Revenue
The components of revenue and the resulting variances are as follows (dollars in millions):
 
Year Ended December 31,
 
Variance
 
 
2014 vs. 2013
 
2014
 
2013
 
Amount
 
%
Net operating interest income
$
1,074

 
$
969

 
$
105

 
11
 %
Commissions
456

 
420

 
36

 
9
 %
Fees and service charges
200

 
168

 
32

 
19
 %
Principal transactions
10

 
73

 
(63
)
 
(86
)%
Gains (losses) on securities and other
36

 
61

 
(25
)
 
(41
)%
Net impairment

 
(3
)
 
3

 
*

Other revenues
38

 
35

 
3

 
9
 %
Total non-interest income
740

 
754

 
(14
)
 
(2
)%
Total net revenue
$
1,814

 
$
1,723

 
$
91

 
5
 %
 
*
Percentage not meaningful.

37


Net Operating Interest Income
Net operating interest income increased 11% to $1.1 billion for the year ended December 31, 2014 compared to 2013. Net operating interest income is earned primarily through investing deposits and customer payables in assets including: available-for-sale securities, held-to-maturity securities, margin receivables and real estate loans.
The fluctuation in enterprise interest-earning assets was driven primarily by changes in enterprise interest-bearing liabilities, specifically deposits and customer payables. Average enterprise interest-earning assets increased 1% to $41.4 billion for the year ended December 31, 2014, compared to 2013. The increase in average enterprise interest-earning assets was primarily a result of increases in average held-to-maturity securities and margin receivables, which were partially offset by a decrease in average loans compared to 2013.
Average enterprise interest-bearing liabilities increased 1% to $38.4 billion for the year ended December 31, 2014, compared to 2013. The increase in average enterprise interest-bearing liabilities was primarily due to increases in average customer payables and securities loaned and other, partially offset by decreases in average deposits and securities sold under agreements to repurchase.
As part of our strategy to strengthen our overall financial and franchise position, we focused on improving our capital ratios by reducing risk and deleveraging the balance sheet. Our deleveraging strategy included transferring customer deposits to third party institutions. At December 31, 2014, $15.5 billion of our customers' assets were held at third party institutions, including third party banks and money market funds. Approximately 72% of these off-balance sheet assets resulted from our deleveraging efforts. We estimate the impact of our deleveraging efforts on net operating interest income at December 31, 2014 to be approximately 125 basis points based on the estimated current re-investment rates on these assets, less approximately 28 basis points of cost associated with holding these assets on our balance sheet, primarily FDIC insurance premiums.
Enterprise net interest spread increased 22 basis points to 2.55% for the year ended December 31, 2014 compared to 2013. The increase in enterprise net interest spread was driven by changes in average balances and average interest rates earned or paid on those balances. During the year ended December 31, 2014, the increase in enterprise net interest spread was driven primarily by the growth in margin receivables and increased revenue earned from our securities lending activities, along with lower wholesale borrowing costs due to a decrease in securities sold under agreements to repurchase. These increases were partially offset by the continued run-off in loans and lower rates earned on margin receivables.
Commissions
Commissions revenue increased 9% to $456 million for the year ended December 31, 2014 compared to 2013. DART volume increased 12% to 168,474 for the year ended December 31, 2014 compared to 2013. Option-related DARTs as a percentage of total DARTs represented 22% of trading volume for the year ended December 31, 2014, compared to 24% in 2013. Average commission per trade decreased 3% to $10.81 for the year ended December 31, 2014 compared to 2013.

38


Fees and Service Charges
Fees and service charges increased 19% to $200 million for the year ended December 31, 2014 compared to 2013. The table below shows the components of fees and service charges and the resulting variances (dollars in millions):
 
Year Ended December 31,
 
Variance
 
 
2014 vs. 2013
 
2014
 
2013
 
Amount
 
%
Order flow revenue
$
92

 
$
72

 
$
20

 
28
 %
Mutual fund service fees
23

 
21

 
2

 
10
 %
Advisor management fees
23

 
14

 
9

 
64
 %
Foreign exchange revenue
16

 
15

 
1

 
7
 %
Reorganization fees
8

 
9

 
(1
)
 
(11
)%
Money market funds and sweep deposits revenue(1)
14

 
13

 
1

 
8
 %
Other fees and service charges
24

 
24

 

 
0
 %
Total fees and service charges
$
200

 
$
168

 
$
32

 
19
 %
(1)
Includes revenue earned on average customer assets held by third parties outside the Company, including money market funds and sweep deposit accounts at unaffiliated financial institutions. Fees earned on these customer assets are based on the federal funds rate or LIBOR plus a negotiated spread or other contractual arrangement with the third party institutions.
The increase in fees and services charges for the year ended December 31, 2014, compared to 2013, was driven primarily by increased order flow revenue as a result of increased trading volumes and as E*TRADE Securities began routing all of its order flow to third parties following the sale of G1 Execution Services, LLC which was completed on February 10, 2014. In addition, advisor management fees increased, driven by assets in managed accounts within our retirement, investing and savings products, which were $3.1 billion at December 31, 2014, compared to $2.4 billion at December 31, 2013.
Principal Transactions
Principal transactions decreased 86% to $10 million for the year ended December 31, 2014 compared to 2013. Principal transactions were derived from our market making business in which we acted as a market-maker for our brokerage customers’ orders as well as orders from third party customers. On February 10, 2014, we completed the sale of the market making business and no longer generate principal transactions revenue.
Gains (Losses) on Securities and Other
The table below shows the components of gains (losses) on securities and other and the resulting variances (dollars in millions):
 
Year Ended December 31,
 
Variance
 
 
2014 vs. 2013
 
2014
 
2013
 
Amount
 
%
Gains (losses) on loans, net
$
4

 
$
(1
)
 
$
5

 
*

Gains on available-for-sale securities, net
42

 
61

 
(19
)
 
(31
)%
Hedge ineffectiveness
(10
)
 
1

 
(11
)
 
*

Gains on securities, net
32

 
62

 
(30
)
 
(48
)%
Gains (losses) on securities and other
$
36

 
$
61

 
$
(25
)
 
(41
)%
 
*
Percentage not meaningful.

39


Gains on securities and other decreased 41% to $36 million for the year ended December 31, 2014 compared to 2013. The activity for the year ended December 31, 2014 included a $7 million gain recognized on the sale of one- to four-family loans modified as TDRs and a $6 million gain recognized on the sale of our remaining available-for-sale non-agency CMOs.
Provision (Benefit) for Loan Losses
Provision for loan losses decreased 75% to $36 million for the year ended December 31, 2014 compared to 2013. The decrease in provision for loan losses was driven primarily by improving economic conditions, as evidenced by the lower levels of delinquent loans in the one- to four-family and home equity loan portfolios, lower net charge-offs, home price improvement and loan portfolio run-off for the year ended December 31, 2014. The reduction in the provision for loan losses was partly offset by enhancements in our quantitative allowance methodology. During the year ended December 31, 2014, we enhanced our quantitative allowance methodology to identify higher risk home equity lines of credit and extend the period of management’s forecasted loan losses captured within the general allowance to include the total probable loss on a subset of identified higher risk home equity lines of credit. These enhancements drove the migration of estimated losses previously captured on these loans from the qualitative component to the quantitative component of the general allowance, and drove the majority of the provision for loan losses within the home equity portfolio during the year ended December 31, 2014.
For the year ended December 31, 2013, we evaluated and refined our default assumptions related to a subset of the home equity line of credit portfolio that will require borrowers to repay the loan in full at the end of the draw period, commonly referred to as "balloon loans". We recorded additional provision related to $235 million of balloon loans at December 31, 2013. We increased our default assumptions and extended the period of management's forecasted loan losses captured within the general allowance to include the total probable loss on the higher risk balloon loans as a result of our evaluation. The overall impact of these refinements drove the substantial majority of provision for loan losses during the year ended December 31, 2013.
Operating Expense
The components of operating expense and the resulting variances are as follows (dollars in millions):
 
Year Ended December 31,
 
Variance
 
 
2014 vs. 2013
 
2014
 
2013
 
Amount
 
%
Compensation and benefits
$
412

 
$
363

 
$
49

 
13
 %
Advertising and market development
120

 
108

 
12

 
11
 %
Clearing and servicing
94

 
124

 
(30
)
 
(24
)%
FDIC insurance premiums
79

 
104

 
(25
)
 
(24
)%
Professional services
112

 
85

 
27

 
32
 %
Occupancy and equipment
79

 
73

 
6

 
8
 %
Communications
71

 
69

 
2

 
3
 %
Depreciation and amortization
78

 
89

 
(11
)
 
(12
)%
Amortization of other intangibles
22

 
24

 
(2
)
 
(8
)%
Impairment of goodwill

 
142

 
(142
)
 
*

Restructuring and other exit activities
8

 
28

 
(20
)
 
(71
)%
Other operating expenses
70

 
66

 
4

 
6
 %
Total operating expense
$
1,145

 
$
1,275

 
$
(130
)
 
(10
)%
 
*
Percentage not meaningful.
Compensation and Benefits
Compensation and benefits increased 13% to $412 million for the year ended December 31, 2014 compared to 2013. The increase resulted primarily from increased salaries expense due to increased headcount and increased incentive compensation when compared to 2013.

40


Advertising and Market Development
Advertising and market development expense increased 11% to $120 million for the year ended December 31, 2014 compared to 2013. The increase in advertising and market development resulted primarily from the launch of Type E*, our new brand platform during the year ended December 31, 2014, in addition to lower advertising and market development expenses during the year ended December 31, 2013 driven by the expense reduction initiatives in the prior period.
Clearing and Servicing
Clearing and servicing decreased 24% to $94 million for the year ended December 31, 2014 compared to 2013. The decrease resulted primarily from a decrease in clearing fees as a result of the sale of the market making business which was partially offset by costs associated with an increase in trading volumes, when compared to 2013. Additionally, servicing fees decreased when compared to the same period in 2013 as the loan portfolio continued to run off.
FDIC Insurance Premiums
FDIC insurance premiums decreased 24% to $79 million for the year ended December 31, 2014 compared to the same period in 2013. The decrease was due to the sale of $0.8 billion of our one- to four-family loans modified as TDRs during the second quarter of 2014, as well as continued improvement and quality of our balance sheet, improving capital ratios and overall risk profile when compared to 2013. TDRs are considered underperforming assets and are assessed at a higher rate in the FDIC insurance calculation.
Professional Services
Professional services increased 32% to $112 million for the year ended December 31, 2014 compared to 2013, primarily driven by professional services engagements focused on improving the customer experience and overall product offering, as well as our continued enterprise risk management build-out.
Impairment of Goodwill
Impairment of goodwill was $142 million for the year ended December 31, 2013. At the end of June 2013, we decided to exit the market making business, and as a result recorded $142 million in goodwill impairment, representing the entire carrying amount of goodwill allocated to this business. There were no similar charges during the year ended December 31, 2014.
Restructuring and Other Exit Activities
Restructuring and other exit activities were $8 million for the year ended December 31, 2014 compared to $28 million for 2013. The costs in 2014 were driven by severance costs incurred primarily related to our exit of the market making business, and were partially offset by the $4 million gain on the sale of that business, which was completed in February 2014. The costs in 2013 were driven primarily by severance costs incurred as part of the expense reduction initiatives in prior periods.
Other Income (Expense)
Other income (expense) increased 65% to $181 million for the twelve months ended December 31, 2014 compared to the same period in 2013, as shown in the following table (dollars in millions):