eTrade 2012 Annual Report Download - page 64

Corporate cash is the primary source of liquidity at the parent company. We define corporate cash as cash
held at the parent company as well as cash held in certain subsidiaries that can distribute cash to the parent
company without any regulatory approval. We believe corporate cash is a useful measure of the parent
company’s liquidity as it is the primary source of capital above and beyond the capital deployed in our regulated
subsidiaries. Corporate cash can fluctuate in any given quarter and is impacted primarily by tax settlements,
approval and timing of subsidiary dividends, debt service costs and other overhead cost sharing arrangements. In
the fourth quarter of 2012, we refinanced $1.3 billion of our higher yielding corporate debt resulting in a decrease
in our annual debt service costs of approximately $55 million. We target corporate cash to be at least two times
our annual debt service, or approximately $220 million. From the level of corporate cash at December 31, 2012,
we expect that it will decline generally in line with our corporate interest expense. However, the parent company
has approximately $450 million in net deferred tax assets, which will ultimately become sources of corporate
cash as the parent’s subsidiaries reimburse the parent for the use of its deferred tax assets.
Liquidity Available from Subsidiaries
Liquidity available to the Company from its subsidiaries is limited by regulatory requirements. In addition,
neither E*TRADE Bank nor its subsidiaries may pay dividends to the parent company without approval from its
regulators. Loans by E*TRADE Bank to the parent company and its other non-bank subsidiaries are subject to
various quantitative, arm’s length, collateralization and other requirements.
E*TRADE Bank is subject to capital requirements determined by its primary regulators. At December 31,
2012 and 2011, E*TRADE Bank had $1.6 billion and $1.2 billion, respectively, of Tier 1 leverage capital in
excess of the regulatory minimum level required to be considered “well capitalized.”
The Company’s broker-dealer subsidiaries are subject to capital requirements determined by their respective
regulators. At December 31, 2012 and 2011, all of our brokerage subsidiaries met their minimum net capital
requirements. Our broker-dealer subsidiaries had excess net capital of $655.1 million at December 31, 2012, a
decrease of $20.0 million from $675.1 million at December 31, 2011. The excess net capital of the broker-dealer
subsidiaries at December 31, 2012 included $535.3 million and $79.1 million of excess net capital at E*TRADE
Clearing LLC and E*TRADE Securities LLC, respectively, which are subsidiaries of E*TRADE Bank and are
also included in the excess capital of E*TRADE Bank.
Financial Regulatory Reform Legislation and Basel III Framework
Under the Dodd-Frank Act, our former primary regulator, the OTS, was abolished in July 2011 and its
functions and personnel distributed among the OCC, the FDIC and the Federal Reserve. Although the
Dodd-Frank Act maintains the federal thrift charter, it eliminates certain benefits of the charter and imposes new
penalties for failure to comply with the qualified thrift lender test. The Dodd-Frank Act also 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.
The implementation of holding company capital requirements will impact us as the parent company was not
previously subject to regulatory capital requirements. These requirements are expected to become effective
within the next three years. We believe these capital ratios are an important measure of capital strength and
accordingly manage our capital against the current capital ratios that apply to bank holding companies in
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