eTrade 2012 Annual Report Download - page 161

The Company is required to establish a valuation allowance for deferred tax assets and record a charge to
income if it is determined, based on available evidence at the time the determination is made, that it is more
likely than not that some portion or all of the deferred tax assets will not be realized. If the Company did
conclude that a valuation allowance was required, the resulting loss could have a material adverse effect on its
financial condition and results of operations. For the three-year period ended December 31, 2012, the Company
was no longer in a cumulative book loss position. As of December 31, 2012, the Company did not establish a
valuation allowance against its federal deferred tax assets as it believes that it is more likely than not that all of
these assets will be realized. Approximately half of existing federal deferred tax assets are not related to net
operating losses and therefore, have no expiration date. The Company ended 2012 with $1,956.3 million of gross
federal net operating losses, the majority of which will expire within the next 15 years.
The Company’s evaluation focused on identifying significant, objective evidence that it will be able to
realize its deferred tax assets in the future. The Company determined that its expectations regarding future
earnings are objectively verifiable due to various factors. One factor is the consistent profitability of the
Company’s core business, the trading and investing segment, which has generated substantial income for each of
the last nine years, including through uncertain economic and regulatory environments. The core business is
driven by brokerage customer activity and includes trading, brokerage cash, margin lending, retirement and
investing, and other brokerage related activities. These activities drive variable expenses that correlate to the
volume of customer activity, which has resulted in stable, ongoing profitability in this business.
Another factor is the mitigation of losses in the balance sheet management segment, which generated a large
net operating loss in 2007 caused by the crisis in the residential real estate and credit markets. Much of this loss
came from the sale of the asset-backed securities portfolio and credit losses from the mortgage loan portfolio.
The Company no longer holds any of those asset-backed securities and shut down mortgage loan acquisition
activities in 2007. In effect, the key business activities that led to the generation of the deferred tax assets were
shut down over five years ago. As a result, the losses have continued to decline significantly and the balance
sheet management segment became profitable in 2012. In addition, the Company continues to realize the benefit
of various credit loss mitigation activities for the mortgage loans purchased in 2007 and prior, most notably,
actively reducing or closing unused home equity lines of credit and aggressively exercising put-back clauses to
sell back improperly documented loans to the originators. As a result of these loss containment measures,
provision for loan losses has declined for four consecutive years, down 78% from its peak of $1.6 billion for the
year ended December 31, 2008.
For certain of the Company’s state, foreign country and charitable contribution deferred tax assets, the
Company maintained a valuation allowance of $97.8 million and $73.5 million at December 31, 2012 and 2011,
respectively, as it is more likely than not that they will not be fully realized.
The principal components of the deferred tax assets for which a valuation allowance has been established
include the following state and foreign country net operating loss carry forwards and charitable contributions
which have a limited carry forward period:
• At December 31, 2012, the Company had certain gross foreign country net operating loss carry
forwards and other foreign country temporary differences of approximately $144.5 million for which a
deferred tax asset of approximately $35.4 million was established. The foreign net operating losses
represent the foreign tax loss carry forwards in numerous foreign countries, the vast majority of which
are not subject to expiration. In most of these foreign countries, the Company has historical tax losses;
accordingly, the Company has provided a valuation allowance of $35.4 million against such deferred
tax assets at December 31, 2012.
• At December 31, 2012, the Company had gross state net operating loss carry forwards that expire
between 2022 and 2032 in several states of $3.6 billion, most of which are subject to reduction by
apportionment changes. A deferred tax asset of approximately $136.5 million has been established
related to these state net operating loss carry forwards, temporary differences and other tax attributes
with a valuation allowance of $52.2 million against such deferred tax assets at December 31, 2012.
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