eTrade 2012 Annual Report Download - page 47

As of the date of the ownership change, we had federal NOLs available to carry forward of approximately
$1,886.3 million. This amount includes $479.7 million in federal NOLs that were recorded in the third quarter of
2012 due to amended tax returns we filed that related primarily to additional tax deductions on the 2009 Debt
Exchange and additional tax losses on bad debts. Section 382 imposes an annual limitation on the use of a
corporation’s NOLs, certain recognized built-in losses and other carryovers after an “ownership change” occurs.
Section 382 rules governing when a change in ownership occurs are complex and subject to interpretation;
however, an ownership change generally occurs when there has been a cumulative change in the stock ownership
of a corporation by certain “5% shareholders” of more than 50 percentage points over a rolling three-year period.
Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a
corporation may offset with pre-ownership change NOLs. In general, the annual limitation is determined by
multiplying the value of the corporation’s stock immediately before the ownership change (subject to certain
adjustments) by the applicable long-term tax-exempt rate. Any unused portion of the annual limitation is
available for use in future years until such NOLs are scheduled to expire (in general, NOLs may be carried
forward 20 years). In addition, the limitation may, under certain circumstances, be increased or decreased by
built-in gains or losses, respectively, which may be present with respect to assets held at the time of the
ownership change that are recognized in the five-year period (one-year for loans) after the ownership change.
The use of NOLs arising after the date of an ownership change would not be affected unless a corporation
experienced an additional ownership change in a future period.
We believe the tax ownership change will extend the period of time it will take to fully utilize our pre-
ownership change NOLs, but will not limit the total amount of pre-ownership change federal NOLs we can
utilize. Our updated estimate is that we will be subject to an overall annual limitation on the use of our pre-
ownership change NOLs of approximately $194 million. The overall pre-ownership change federal NOLs, which
were approximately $1,886.3 million, have a statutory carry forward period of 20 years (the majority of which
expire in 15 years). As a result, we believe we will be able to fully utilize these NOLs in future periods.
Our ability to utilize the pre-ownership change NOLs is dependent on our ability to generate sufficient
taxable income over the duration of the carry forward periods and will not be impacted by our ability or inability
to generate taxable income in an individual year.
2011 Compared to 2010
We generated net income of $156.7 million, or $0.54 per diluted share, on total revenue of $2.0 billion for
the year ended December 31, 2011. Commissions, fees and service charges, principal transactions and other
revenue decreased 2% to $711.3 million for the year ended December 31, 2011 compared to 2010, which was
driven by the elimination of all account activity fees, which took effect in the second quarter of 2010. In addition,
gains on loans and securities, net and net impairment decreased 18% to $105.3 million for the year ended
December 31, 2011 compared to 2010.
Provision for loan losses declined 43% to $440.6 million for the year ended December 31, 2011 compared
to 2010, driven by improving credit trends and loan portfolio run-off. Total operating expense increased 8% to
$1.2 billion for the year ended December 31, 2011 compared to 2010. This increase was driven primarily by
increases in advertising and market development expense, FDIC insurance premiums and other operating
expenses during the year ended December 31, 2011.
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