E*TRADE Financial Corporation is a financial services company that provides brokerage and related products and services for traders, investors, stock plan administrators and participants, and RIAs. The Company also provides investor-focused banking products, including sweep deposit accounts insured by the FDIC, to customers. The Company's most significant, wholly-owned subsidiaries are described below:

The condensed consolidated financial statements, also referred to herein as the consolidated financial statements, include the accounts of the Company and its majority-owned subsidiaries as determined under the voting interest model. Entities in which the Company has the ability to exercise significant influence but in which the Company does not possess control are generally accounted for by the equity method. Entities in which the Company does not have the ability to exercise significant influence are generally carried at cost. The Company also evaluates its initial and continuing involvement with certain entities to determine if the Company is required to consolidate the entities under the variable interest entity (VIE) model. This evaluation is based on a qualitative assessment of whether the Company is the primary beneficiary of a VIE, which requires the Company to possess both: 1) the power to direct the activities that most significantly impact the economic performance of the VIE; and 2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. There are no investments in which the Company represents the primary beneficiary of a VIE; therefore, there are no consolidated VIEs included for all periods presented.

The Company's consolidated financial statements are prepared in accordance with GAAP. Intercompany accounts and transactions are eliminated in consolidation. These consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019.

Preparing the Company's consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented. Actual results could differ from management’s estimates. Certain significant accounting policies are critical because they are based on estimates and assumptions that require complex and subjective judgments by management including the allowance for credit losses, valuation and impairment of goodwill and acquired intangible assets, and income taxes. Management also makes estimates in recognizing accrued operating expenses and other liabilities. These liabilities are impacted by estimates for litigation and regulatory matters as well as estimates related to general operating expenses, such as incentive compensation. Management estimates reflect the liabilities deemed probable at the balance sheet date as determined as part of the Company's ongoing evaluations based on available information.

The Company evaluated its goodwill and finite lived intangible assets for impairment during the three months ended March 31, 2020 as a result of the decline in its share price related to actions taken by the Federal Reserve to contain the financial and economic impact of the COVID-19 pandemic. This analysis included a quantitative impairment test for its goodwill and a review of the recoverability of its finite lived intangible assets. No impairment of goodwill or finite lived intangible assets was indicated as a result of this analysis. The Company's analysis during the three months ended June 30, 2020 did not identify any indicators of impairment for its goodwill and finite lived intangible assets despite the continued impact of COVID-19 on the global economy.

Certain cash and investment balances that are segregated for the exclusive benefit of the Company’s brokerage and futures customers are included in the cash and investments segregated under federal or other regulations line item. Investments include $2.6 billion of securities purchased under agreement to resell from third party banks that were collateralized by US government guaranteed securities and were held for the exclusive benefit of customers pursuant to Rule 15c3-3 at June 30, 2020. Securities purchased under agreement to resell represent short-term reverse repurchase agreements executed between the Company and its counterparty banks. These transactions are accounted for as collateralized financing transactions and are recorded at their contractual amount plus accrued interest. The Company obtains collateral with market value equal to or in excess of the principal amount loaned under the agreement. See Note 5—Offsetting Assets and Liabilities for further details.

The CARES Act was enacted on March 27, 2020 to provide stimulus to the US economy in the form of financial aid to individuals and businesses, among other groups. The CARES Act includes provisions for housing assistance, including mortgage forbearance and foreclosure relief to eligible borrowers. Under the guidance, certain modifications granted to borrowers who are experiencing financial difficulties as a result of the COVID-19 pandemic are not considered TDRs. The Company elected to apply the guidance in the CARES Act and related interagency guidance during the second quarter of 2020. The Company classified applicable loans as nonperforming and placed them on nonaccrual status at the date of the modification consistent with existing accounting policies. Subsequent cash receipts related to these loans will be recognized in interest income. Loans will be returned to accrual status when the borrower's payment deferral period has ended and the borrower resumes payments.

In June 2016, the FASB amended the guidance on accounting for credit losses and subsequently issued clarifications and improvements. The amended guidance requires measurement of an allowance for credit losses for financial instruments, including loans and debt securities, and other commitments to extend credit held at the reporting date. For financial assets measured at amortized cost, factors such as historical performance, prepayment expectations, current conditions, and reasonable and supportable forecasts, including expected recoveries, are used to estimate expected credit losses over the contractual life of the underlying assets. The amended guidance also requires credit losses on impaired available-for-sale debt securities to be recorded through an allowance for credit losses.

The CECL standard allows for subsequent increases in the fair value of collateral for collateral-dependent loans to be recognized up to the amount previously charged-off. A loan is considered to be collateral-dependent when foreclosure is probable or when repayment is expected to be provided substantially through the sale of the underlying collateral when the borrower is experiencing financial difficulty.

The Company adopted the new standard on its effective date of January 1, 2020 using a modified retrospective approach and recognized an after-tax benefit related to mortgage loans of $84 million as an adjustment to opening retained earnings. The benefit primarily related to appreciation of fair value of the underlying collateral for mortgage loans that had been determined to be collateral-dependent and charged-off to the fair value of the underlying collateral in prior periods. This adoption impact is presented on the balance sheet as a “negative allowance” associated with the mortgage loans. Current expected credit losses on the Company’s investment security portfolio, margin receivables, securities-based lending and other financial assets held at amortized cost were not material. Adoption of the standard did not have an impact on the Company’s cash flows. See Note 7—Loans Receivable and Allowance for Credit Losses for further details.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The pandemic, and actions taken by governmental authorities to contain its financial and economic impact, resulted in significant market volatility during the first and second quarters of 2020. The Company's allowance for credit losses as of June 30, 2020 includes the estimated financial impacts of the pandemic on its expected credit losses, including expected losses on loans in forbearance due to COVID-19. See Note 7—Loans Receivable and Allowance for Credit Losses for further details.

The Company's estimate of expected credit losses and related allowance for credit losses for its margin receivables, trade receivables, securities-based lending, securities lending, and agency debt securities were not directly impacted by the pandemic. The Company's analysis of its non-agency portfolio continued to indicate no expectation of credit losses as a result of credit enhancements associated with the investments, including the value of underlying collateral and the ability of subordinated interests to absorb estimated losses. As a result, no allowance for credit losses was recorded related to these portfolios as of June 30, 2020. Management will continue to evaluate conditions related to this and other significant events and their impacts on the factors used to estimate expected credit losses.

Loans receivable, net consists of mortgage and securities-based lending loans that management has the intent and ability to hold for the foreseeable future or until maturity, also known as loans held-for-investment. The related allowance for credit losses is determined in accordance with the amended CECL guidance.

Mortgage loans consist of the Company’s one- to- four-family and home equity loans. Current expected credit losses for mortgage loans that share similar risk characteristics, including loans that are performing in accordance with their contractual terms, are determined on a collective basis. Current expected credit losses for mortgage loans that do not share similar risk characteristics, including loans modified as TDRs and loans that are collateral-dependent, are determined individually based on the characteristics of each loan. The Company’s accounting policies and practices for evaluating the risk characteristics of its mortgage loan portfolio were not impacted by the adoption of the new guidance.

The Company’s accounting policies and practices for determining that a loan should be placed on nonaccrual status or that a loan has become delinquent or uncollectible, including the policies for discontinuing accrual of interest, recording payments received, and resuming accrual of interest were not impacted by the adoption of the new guidance. See Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies in Part II. Item 8. Financial Statements and Supplementary Data of our Annual Report on Form 10-K for the year ended December 31, 2019 for a description of these policies.

The Company uses a probability of default and loss given default model for determining the allowance for credit losses for its mortgage loans that are evaluated collectively. A probability of default and loss given default model utilizes prepayment forecasts, loan amortization calculations, and other internally derived and externally sourced data and assumptions to determine the likelihood that the Company’s mortgage loans will experience a default and determine the expected loss given default. The Company also utilizes an externally provided macroeconomic forecast over the remaining life of the loans. The model parameters are adjusted to reflect past events, including general default data for loans with similar vintages and the Company's historical experience with borrower defaults, prepayments, losses, and charge-offs over the past 12 months.

The Company utilizes a qualitative factor framework whereby, on a quarterly basis, the risk associated with the following three primary sets of factors are evaluated: external factors, internal factors, and portfolio specific factors. The uncertainty related to these factors may expand over time, temporarily impacting the qualitative component in advance of the more precise identification of these expected credit losses within the modeled credit losses. Management’s estimate of expected credit losses includes qualitative adjustments for model weaknesses, macroeconomic forecast uncertainty, and recoveries. The Company’s forecast includes a forward-looking view of macroeconomic factors over the next two to five years, after which the macroeconomic factors revert to externally provided long-term equilibrium values, rates, or patterns that do not include specific predictions for the economy. Key inputs for the forecast include US home prices and unemployment data.

Loan modifications accounted for as TDRs that are not collateral-dependent are considered to be cash-flow dependent as the Company expects repayment to come from the loan principal and interest. The Company uses a discounted cash flow method to discount expected cash flows for these loans using the loan’s effective interest rate immediately prior to modification. Assumptions utilized in the discounted cash flow model are based on pools of loans that had modifications completed under the Company's loss mitigation program in which an economic concession was granted to the borrower experiencing financial difficulties. The Company does not adjust the effective interest rate for estimated prepayment assumptions. The allowance for credit losses reflects the difference between the amortized cost basis and the present value of the expected cash flows. Changes in the present value of expected cash flows are presented as credit loss expense or a reversal of credit loss expense.

A mortgage loan is considered collateral-dependent when repayment is expected to be provided substantially through sale of the collateral when the borrower is experiencing financial difficulty or where foreclosure is probable. The Company uses the fair value of the collateral at the reporting date when measuring the net carrying amount of the asset and determining the allowance for credit losses. The fair value of the collateral is adjusted for estimated costs to sell. When the fair value of the collateral less costs to sell at the reporting date exceeds the recorded investment in the loan, the Company adjusts the allowance for credit losses such that the net carrying value equals the fair value of the collateral, less costs to sell. Such instances will result in a “negative allowance,” or increase to the carrying value of the loan receivable; however, any such amount cannot exceed amounts previously charged-off.

If the fair value of the collateral less estimated costs to sell subsequently declines, the Company will adjust the carrying value of the mortgage loan by first reversing any applicable negative allowance previously recorded. When applicable, the Company will further adjust the recorded investment of the mortgage loan by recording an incremental charge-off. Changes in the fair value of the collateral less costs to sell are recorded as a provision (benefit) for credit losses.

The Company does not measure an allowance for credit losses for accrued interest receivable on mortgage loans because the Company reverses accrued interest receivable on loans that have principal or interest that is 90 days or greater past due, TDRs that are placed on nonaccrual status for all classes of loans (including loans in bankruptcy), and certain junior liens that have a delinquent senior lien. The Company reverses accrued interest through interest income.

Securities-based lending includes the E*TRADE Line of Credit product, which allows customers to borrow against the market value of their securities pledged as collateral, and securities lending, which includes deposits paid for securities borrowed that are recorded at the amount of cash collateral advanced. The E*TRADE Line of Credit portfolio is included within the Loans receivable, net line item on the consolidated balance sheets. Deposits paid for securities borrowed are included within the Receivables from brokers, dealers, and clearing organizations line item while deposits paid for securities borrowed under the fully paid lending program are included in the Other assets line item on the consolidated balance sheets.

Securities-based lending is fully collateralized by cash and securities with fair values in excess of the amount borrowed. The borrowers are contractually required to continually adjust the amount of the collateral as a result of changes in its fair value such that the collateral can be replenished on a daily basis. The Company expects the borrowers will continually replenish the collateral and elected the practical expedient which permits it to compare the amortized cost basis of the loaned amount with the fair value of collateral received at the reporting date to estimate expected credit losses. As a result of this election, and the fully collateralized nature of these arrangements, the Company has no expectation of credit losses on its securities-based lending loans. The Company fully reserves for unsecured securities-based lending and related accrued interest receivable when they become 90 days past due.

Margin receivables represent credit extended to customers to finance their purchases of securities by borrowing against securities they own and are fully collateralized by these securities in customer accounts. Similar to securities-based lending, the borrowers of a margin loan are contractually required to continually adjust the amount of the collateral as a result of changes in its fair value such that the collateral can be replenished on a daily basis. The Company expects the borrowers will continually replenish the collateral as necessary because the Company subjects the borrowers to an internal qualification process and an interview to align investing objectives and risk appetite in addition to monitoring customer activity. The Company elected the practical expedient which permits it to compare the amortized cost basis of the loaned amount with the fair value of collateral received at the reporting date to measure the estimate of expected credit losses.

The Company has no expectation of credit losses for margin loans where the fair value of the collateral securing the loans is equal to or in excess of the loaned amount. In cases where the fair value of the collateral is less than the amortized cost basis of the loan, for example, in times of severe or prolonged market volatility, the Company recognizes an allowance for credit losses in the amount of the difference, or unsecured balance. The Company fully reserves for unsecured margin balances and related accrued interest receivable when they become 90 days past due. The allowance for credit losses on margin receivables and the related accrued interest was not material and is presented within the Other assets line of the consolidated balance sheets, and the provision for credit losses is presented within the Other non-interest expenses line of the consolidated statements of income.

The Company’s available-for-sale securities are composed primarily of agency mortgage-backed and agency debt securities, and also include non-agency asset-backed and mortgage-backed securities. The Company’s held-to-maturity securities consist of debt securities, primarily agency mortgage-backed securities and agency debt securities. The Company monitors the credit quality of the agencies and has no expectation of credit losses on investment securities, or the related accrued interest receivable, that are backed by the US government or its agencies because of the credit profiles of those entities and our historical loss experience for such investments. Accrued interest receivable on debt securities is excluded from both the fair value and the amortized cost basis for purposes of identifying and measuring an impairment. All accrued and uncollected interest is reversed against interest income when it is considered uncollectible. As of June 30, 2020, accrued interest receivable for available-for-sale and held-to-maturity securities was $50 million and $72 million, respectively, and is included within the Other assets line of the consolidated balance sheets.

student loan receivables. The Company applies a variety of stress case scenarios based on forecasts to determine expected credit losses in the non-agency portfolio. If an expected credit loss is identified, the Company uses a discounted cash flow method to determine the allowance for credit losses. The discounted cash flow method utilizes the effective interest rate implicit at the acquisition date and contractual cash flows adjusted for expected prepayments and default assumptions. If a security is impaired and the present value of expected cash flows is less than the amortized cost basis of the security, then an allowance for credit loss is recognized, limited to the difference between the fair value and amortized cost of the security. If the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before the recovery of the security’s amortized cost basis, the Company writes down the security’s amortized cost basis to its fair value. There were no expected credit losses on the Company's non-agency available-for-sale securities or related accrued interest receivable as of June 30, 2020. See Note 6—Available-for-Sale and Held-to-Maturity Securities for further details.

The Receivables from brokers, dealers, and clearing organizations line item includes deposits paid for securities borrowed as well as receivables from clearing organizations and other brokerage receivables which are in scope of the amended guidance. The Company continually reviews the credit quality of its counterparties and has not experienced a default. As a result, the Company has zero expectation of credit losses for these arrangements.

In April 2019, the FASB clarified recently released guidance related to credit losses, financial instruments, derivatives and hedging. The FASB has an ongoing project on its agenda for improving the FASB's Accounting Standards Codification or correcting its unintended application. The Company adopted all new guidance related to credit losses on January 1, 2020 using a modified retrospective approach. The new guidance related to financial instruments was applied on January 1, 2020; however, there was no impact to the Company. The Company applied the new guidance related to derivatives and hedging on a prospective basis effective January 1, 2020 and enhanced its derivatives disclosures accordingly. See Note 8—Derivative Instruments and Hedging Activities for further details.

In January 2017, the FASB amended the guidance to simplify the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. The amended guidance requires the Company to perform its annual goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount. An impairment charge would be recognized at the amount by which the carrying amount exceeds the fair value of the reporting unit; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Income tax effects resulting from any tax deductible goodwill should be considered when measuring the goodwill impairment loss, if applicable. The Company has the option to perform a qualitative assessment to conclude whether it is more likely than not that the carrying amount of the Company exceeds its fair value. The Company adopted the new standard on its effective date of January 1, 2020 and applied the standard prospectively.

In August 2018, the FASB amended the guidance on accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The amended guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted the new standard on its effective date of January 1, 2020 and applied the standard prospectively. Implementation costs incurred on and after January 1, 2020 in a cloud computing arrangement that is a service contract are capitalized or expensed in accordance with the accounting guidance, and capitalized costs are amortized over the term of the hosting arrangement.

In December 2019, the FASB amended the guidance to simplify the accounting for income taxes as part of its initiative to reduce complexity in accounting standards. The amendments remove certain exceptions to the general income tax accounting principles and provide for consistent application of and simplify GAAP for other areas by clarifying and amending existing guidance. The guidance will be effective for interim and annual periods beginning January 1, 2021 and each amendment will be applied on either a retrospective basis, modified retrospective basis, or prospective basis as required in accordance with the new standard. The Company is currently evaluating the impact of these clarifications on the Company's financial condition, results of operations and cash flows.

In January 2020, the FASB amended the guidance to clarify the interaction of the accounting for equity securities and investments accounted for under the equity method of accounting and the accounting for certain forward contracts and purchased options. The amended guidance clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative immediately before applying or upon discontinuing the equity method. The amended guidance also clarifies how a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option. The guidance will be effective for interim and annual periods beginning January 1, 2021, and must be applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact of these clarifications on the Company's financial condition, results of operations and cash flows.

In March 2020, the FASB amended the guidance to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective for hedges in place as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the timing of adoption and the impact of these amendments, which when adopted, could have a material impact on the Company's financial condition and results of operations. For example, any changes in the designated benchmark rate affecting the cumulative fair value hedge basis adjustment as a result of an anticipated discontinuance of LIBOR would be recognized in current earnings in the period of adoption.