eTrade 2012 Annual Report Download - page 46

international restructuring activities. This liquidation resulted in the taxable recognition of certain losses,
including historical acquisition premiums that we incurred internationally. This tax benefit resulted in a
corresponding increase to the net deferred tax asset.
Valuation Allowance
The net deferred tax asset was $1,416.2 million and $1,578.7 million at December 31, 2012 and 2011,
respectively. We are required to establish a valuation allowance for deferred tax assets and record a charge to
income if we determine, 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 we did conclude that a valuation
allowance was required, the resulting loss could have a material adverse effect on our financial condition and
results of operations. For the three-year period ended December 31, 2012, we were no longer in a cumulative
book loss position. As of December 31, 2012, we did not establish a valuation allowance against federal deferred
tax assets as we believe 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. We expect to utilize the vast majority of the existing federal deferred tax assets within the next six years.
Our evaluation of the need for a valuation allowance focused on identifying significant, objective evidence
that we will be able to realize the deferred tax assets in the future. We determined that our expectations regarding
future earnings are objectively verifiable due to various factors. One factor is the consistent profitability of the
core business, the trading and investing segment, which has generated substantial income for each of the last 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. We
no longer hold 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, we continue 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.
We maintain a valuation allowance for certain of our state deferred tax assets as it is more likely than not
that they will not be realized. At December 31, 2012, we had state deferred tax assets of approximately
$136.5 million that related to our state net operating loss carry forwards and temporary differences with a
valuation allowance of $52.2 million against such deferred tax assets.
Tax Ownership Change
During the third quarter of 2009, we exchanged $1.7 billion principal amount of interest-bearing debt for an
equal principal amount of non-interest-bearing convertible debentures. Subsequent to the 2009 Debt Exchange,
$592.3 million and $128.7 million debentures were converted into 57.2 million and 12.5 million shares of
common stock during the third and fourth quarters of 2009, respectively. As a result of these conversions, we
believe we experienced a tax ownership change during the third quarter of 2009.
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