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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March~~June 3130, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number 1-11921

TRADE Financial Corporation

E*TRADE Financial Corporation

(Exact Name of Registrant as Specified in its Charter)


Delaware						94-2844166
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

671 N. Glebe Road, Arlington, Virginia 22203

(Address of principal executive offices and Zip Code)

(646) 521-4340

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

ETFC

The NASDAQ Stock Market LLC

NASDAQ Global Select Market

_____________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer ¨

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of ~~April~~August 303, 2020, there were 221,~~046~~096,~~419~~380 shares of common stock outstanding.

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E*TRADE FINANCIAL CORPORATION

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended ~~March~~June 3130, 2020

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
	Forward-Looking Statements	1
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4346
	Condensed Consolidated Statements of Income	4447
	Condensed Consolidated Statements of Comprehensive Income	4548
	Condensed Consolidated Balance Sheets	4649
	Condensed Consolidated Statements of Shareholders’ Equity	4750
	Condensed Consolidated Statements of Cash Flows	4851
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	5053
	Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies	5053
	Note 2—Acquisitions and Restructuring	5761
	Note 3—Net Revenue	5862
	Note 4—Fair Value Disclosures	6064
	Note 5—Offsetting Assets and Liabilities	6771
	Note 6—Available-for-Sale and Held-to-Maturity Securities	7074
	Note 7—Loans Receivable and Allowance for Credit Losses	7478
	Note 8—Derivative Instruments and Hedging Activities	8186
	Note 9—Deposits	8389
	Note 10—Other Borrowings and Corporate Debt	8489
	Note 11—Shareholders' Equity	8591
	Note 12—Earnings Per Share	8794
	Note 13—Regulatory Requirements	8894
	Note 14—Commitments, Contingencies and Other Regulatory Matters	8996
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)	3
	Overview	3
	Earnings Overview	16
	Balance Sheet Overview	2326
	Liquidity and Capital Resources	2730
	Risk Management	3336
	Concentrations of Credit Risk	3437
	Summary of Critical Accounting Policies and Estimates	3538
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3639
	Key Terms	3942
Item 4.	Controls and Procedures	9299
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	93100
Item 1A.	Risk Factors	93100
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~102~~110
Item 3.	Defaults Upon Senior Securities	~~103~~110
Item 4.	Mine Safety Disclosure	~~103~~110
Item 5.	Other Information	~~103~~110
Item 6.	Exhibits	~~103~~111
	Signatures	~~104~~112

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Unless otherwise indicated, references to "the Company," "we," "us," "our," "E*TRADE" and "E*TRADE Financial" mean E*TRADE Financial Corporation and its subsidiaries, and references to the parent company mean E*TRADE Financial Corporation but not its subsidiaries.

E*TRADE, E*TRADE Financial, E*TRADE Bank, E*TRADE Savings Bank, the Converging Arrows logo, Power E*TRADE, Equity Edge Online, E*TRADE Advisor Services, E*TRADE Advisor Network, Liberty and Gradifi are trademarks or registered trademarks of E*TRADE Financial Corporation in the United States and in other countries. All other trademarks are the property of their respective owners.

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PART I

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. These statements discuss, among other things:

•our future plans, objectives, outlook, strategies, expectations and intentions relating to our business and future financial and operating results and the assumptions that underlie these matters

•our capital plan initiatives

•the timing and payment of dividends on our common and preferred stock

•the payment of dividends from our subsidiaries to our parent company

•the management of our legacy mortgage loan portfolio

•our ability to comply with future changes to government regulations

•our ability to maintain required regulatory capital ratios

•our ability to meet upcoming debt obligations

•the integration and related restructuring costs of past and any future acquisitions

•the expected outcome of existing or new litigation

•our ability to execute our business plans and manage risk

•future sources of revenue, expense and liquidity

•the ability of our technology solution and referral program for advisors to attract and retain customers seeking specialized services and sophisticated advice

•the expected impact of the adoption of the amended accounting guidance governing the accounting for credit losses

•the expected impact from and responses to the elimination of retail commissions for online US listed stock, exchange-traded funds (ETF), and options trades

•the consummation of the proposed merger with Morgan Stanley and the anticipated benefits thereof

•the current and expected impact of the coronavirus (COVID-19) pandemic, and the measures taken by governmental authorities in response thereto

•any other statement that is not historical in nature

These statements may be identified by the use of words such as "assume," "expect," "believe," "may," "will," "should," "anticipate," "intend," "plan," "estimate," "continue" and similar expressions.

We caution that actual results could differ materially from those discussed in these forward-looking statements. Important factors that could contribute to our actual results differing materially from any forward-looking statements include, but are not limited to:

•changes in business, economic or political conditions

•performance, volume and volatility in the equity and capital markets

•changes in interest rates or interest rate volatility

•our ability to manage our balance sheet size and capital levels

•disruptions or failures of our information technology systems or those of our third-party service providers

•cyber security threats, system disruptions and other potential security breaches or incidents

•customer demand for financial products and services

•our ability to continue to compete effectively and respond to aggressive competition within our industry, such as through the elimination of retail commissions for online US listed stock, ETF and options trades

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•our ability to participate in consolidation opportunities in our industry, to complete consolidation transactions and to realize synergies or implement integration plans

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•our ability to manage our significant risk exposures effectively

•the occurrence of risks associated with our advisory services

•our ability to manage credit risk with customers and counterparties

•our ability to service our corporate debt and, if necessary, to raise additional capital

•changes in government regulation, including interpretations, or actions by our regulators, including those that may result from the implementation and enforcement of regulatory reform legislation

•adverse developments in any existing or new investigations, disciplinary actions or litigation

•changes in actual or forecasted assumptions impacting the measurement of expected credit losses

•the consummation of the proposed merger with Morgan Stanley and the anticipated benefits thereof

•the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities to contain the financial and economic impact of the outbreak

By their nature forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Actual future results may vary materially from expectations expressed or implied in this report or any of our prior communications. Investors should also consider the risks and uncertainties described elsewhere in this report, including under Part II. Item 1A. Risk Factors and Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part I. Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC), which are incorporated herein by reference. The forward-looking statements contained in this report reflect our expectations only as of the date of this report. Investors should not place undue reliance on forward-looking statements, as we do not undertake to update or revise forward-looking statements, except as required by law.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document and with the Annual Report on Form 10-K for the year ended December 31, 2019.


OVERVIEW

Company Overview

E*TRADE is a financial services company that provides brokerage and related products and services for traders, investors, stock plan administrators and participants, and registered investment advisors (RIAs). Founded on the principle of innovation, we aim to enhance the financial independence of customers through a powerful digital offering that includes tools and educational materials, complemented by professional advice and support, catering to the complex and unique needs of customers to help meet their near- and long-term investing goals. We provide these services through our digital platforms and network of industry-licensed customer service representatives and financial consultants, over the phone, by email and online via two national financial centers, and in-person at 30 regional financial centers across the United States. We also operate federally chartered savings banks with the primary purpose of maximizing the value of deposits generated through our brokerage business.

We operate directly and through several subsidiaries, many of which are overseen by governmental and self-regulatory organizations (SROs). Our most important subsidiaries are described below:

•E*TRADE Securities LLC (E*TRADE Securities) is a registered broker-dealer that clears and settles customer transactions

•E*TRADE Bank is a federally chartered savings bank that provides Federal Deposit Insurance Corporation (FDIC) insurance on certain qualifying amounts of customer deposits and provides other banking and cash management capabilities

•E*TRADE Savings Bank, a subsidiary of E*TRADE Bank, is a federally chartered savings bank that provides FDIC insurance on certain qualifying amounts of customer deposits and provides custody solutions for RIAs

•E*TRADE Financial Corporate Services, Inc. (E*TRADE Financial Corporate Services) is a provider of software and services for managing equity compensation plans and student loan and financial wellness benefits to our corporate clients

•E*TRADE Futures LLC (E*TRADE Futures) is a registered non-clearing Futures Commission Merchant (FCM) that provides retail futures transaction capabilities for our customers

•E*TRADE Capital Management LLC (E*TRADE Capital Management) is an RIA that provides investment advisory services for our customers

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Delivering a powerful digital offering for our customers is a core pillar of our business strategy and we believe our focus on being a digital leader in the financial services industry is a competitive advantage. We offer a broad range of products and services to customers through the following channels:

•Retail: Our retail channel services individual brokerage and banking customers that utilize our web, mobile and/or active trading platforms to meet trading, investing and/or banking needs.

•Institutional: Our institutional channels include Corporate Services and Advisor Services. We provide stock plan, student loan and financial wellness solutions for public and private companies globally through our corporate services channel. We provide custody services to independent RIAs through our advisor services channel.


STRATEGY

Our business strategy is focused on leveraging our brand, hybrid support model, and technology to grow our retail and institutional channels while generating robust earnings growth and maximizing shareholder returns.

Leverage our brand, hybrid support model, and leading technology for scale and growth

E*TRADE's unrivaled and tech-forward brand is synonymous with digital brokerage and drives outsized awareness and consideration among business-to-customer and business-to-business audiences. Our customers benefit from digitally led experiences, complemented by professional advice and support. We cater to the complex and unique needs of traders, investors, stock plan administrators and participants, and independent RIAs. We are able to serve peak volumes across channels with capacity for growth through our strong and scalable infrastructure.

Empower self-directed retail customers through a powerful digital offering and professional guidance

E*TRADE has three core digital offerings for the retail investor—trading, investing, and banking. We maintain a leading position among active and derivatives traders through the Power E*TRADE web-based platform and support model. We connect customers with a range of easy to use wealth management solutions. We are also advancing digital banking capabilities to complement our existing product set and increase engagement with customers and prospects.

Capitalize on symbiotic institutional channels to drive growth

E*TRADE's corporate services and advisor services channels are critical for growth. We aim to expand on our #1 position in stock plan administration through innovative digital solutions, complementary service offerings and expert support—driving growth in retail and institutional relationships. We plan to leverage the power of E*TRADE's brand, digital ethos, and our broad customer base to grow the advisor services channel. We also plan to connect retail customers and stock plan participants seeking higher touch services to top-tier advisors through our referral network—driving asset growth and retention.

Generate robust earnings growth and shareholder returns

We aim to deliver superior returns on customer assets by capturing the full value of our retail and institutional relationships and leveraging E*TRADE's highly scalable model to generate robust earnings growth and maximize shareholder returns.

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PRODUCTS AND SERVICES

Our hybrid delivery model is available through the following award-winning digital platforms which are complemented by professional advice and support.

Platforms for Retail Channel⁽¹⁾

Platforms for Institutional Channels⁽¹⁾

Web

Equity Edge Online⁽²⁾

Our easy to use site is the primary channel to interact with customers and prospects

Equity Edge Online is the #1 rated platform in the stock plan administration industry that offers automation and flexibility

Mobile

Gradifi

Our industry leading mobile applications include integrations with leading mobile artificial intelligence assistants

Gradifi is a scalable, streamlined platform that offers student loan and financial wellness benefits

Active Trading Platforms

Liberty

Active derivatives trading platforms include sophisticated trading tools, advanced portfolio and market tracking, and idea generation and analysis

Liberty is intuitive technology built for RIAs that simplifies the investment and management of client assets

Complemented by professional advice and support

Customer Service

Financial Consultants

Customer service is available 24/7 via phone, email or chat from industry licensed representatives. White glove service is available for our highest-tiered customers

Financial consultants are available by phone or at branches to provide one-on-one investing advice

Active Trader Services

Corporate Services

Active trader services includes specialized support for sophisticated customers with advanced knowledge and skill

Corporate services support includes personalized service on a global scale driven by dedicated relationship and service managers backed by comprehensive training and education

Advisor Services

Advisor services support includes dedicated relationship managers who act as a single point of contact for specialized support

(1)In August 2019, E*TRADE was rated the #1 online broker in Kiplinger's 2019 Best Online Brokers Review. In the current year, we maintained our #1 ranking for Mobile Trading, Options Trading, and Web-based Platform (Power E*TRADE) in Stockbrokers.com's 2020 review of Best Online Brokers for Stock Trading. We also finished Best in Class for research, education, active trading, futures trading, and IRA accounts. In March 2020, E*TRADE was also named Best Broker for ease of trading and beginning options traders in Investopedia's 2020 Online Broker review.

(2)In September 2019, Equity Edge Online was rated #1 in Loyalty and Overall Satisfaction for the eighth consecutive year in the Group Five Stock Plan Administration Benchmark Study.

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We deliver a broad range of products and services through our retail and institutional channels across the following five product areas: Trading, Investing, Banking and Cash Management, Corporate Services and Advisor Services.

Trading

The Company delivers automated trade order placement and execution services, offering our customers a full range of investment vehicles, including US equities, ETFs, options, bonds, futures, American depositary receipts and non-proprietary mutual funds. We also offer margin accounts, enabling qualifying customers to borrow against their securities, supported by robust customer tools to analyze positions and understand collateral requirements. The Company also offers a fully paid lending program which allows customers to earn income on certain securities when they permit us to lend these securities.

The Company markets trading products and services to active traders and self-directed investors. Products and services are delivered through web, mobile, and active trading platforms. Trading tools are supported by guidance, including options, futures and fixed income specialists available on-call for customers. Other tools and resources include independent research and analytics, live and on-demand education, market commentary, trading ideas, strategies, and screeners for major asset classes.

Investing

The Company endeavors to help investors build wealth and address their long-term investing needs through a suite of managed products, asset allocation models, and other services. These include our Core Portfolios, Blend Portfolios, Dedicated Portfolios, and Fixed Income Portfolios. The Company offers self-directed digital tools across web and mobile platforms, including mutual fund and ETF screeners, All-Star Lists, a collection of pre-built ETF or mutual fund portfolios based on time frame and risk tolerance, an assortment of planning and allocation tools, thematic investing opportunities, education and editorial content. Investors also have access to a wide selection of ETFs and mutual funds, including approximately 2,300 ETFs and more than 4,~~600~~500 no-load, no-transaction fee mutual funds.

The Company also offers guidance through a team of licensed financial consultants and Chartered Retirement Planning Counselors^SM at our 30 regional financial centers and through our two national financial centers by phone, email and online. Customers can also receive complimentary portfolio reviews and personalized investment recommendations.

Banking and Cash Management

The Company's banking and cash management capabilities include deposit accounts insured by the FDIC, which are fully integrated into customer brokerage accounts. E*TRADE Bank's deposit account offerings include the Premium Savings Account, which generally provides a higher yield to savings account customers as compared to our other deposit products. Among other features, E*TRADE Bank's customers can transfer to and from accounts at E*TRADE and elsewhere for free, and checking account customers have access to debit cards with ATM fee refunds, online and mobile bill pay, and mobile check deposits. We also offer the E*TRADE Line of Credit, a securities-based lending program, which allows customers to borrow against the market value of securities pledged as collateral.

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Corporate Services

Through our industry-leading platform, Equity Edge Online, the Company offers fully-automated employee stock plan and employee stock purchase plan administration, as well as comprehensive accounting, reporting and scenario modeling tools. The integrated stock plan solutions include multi-currency settlement and delivery, and streamlined tax calculation. Additionally, corporate clients are offered 10b5-1 plan design and implementation, along with SEC filing assistance and automated solutions. Participants have full access to E*TRADE's robust investing and trading capabilities, including tailored education and planning tools, and dedicated stock plan service representatives. Comprehensive financial wellness and student loan solutions have been introduced to complement our existing corporate services offering with the acquisition of Gradifi, Inc. (Gradifi) in December 2019. Refer to Note 2—Acquisitions and Restructuring for further details.

Corporate Services is an important driver of account and asset growth, serving as a conduit to the retail channel. Over the trailing 12 months, there were $~~101~~96 billion of gross inflows into our corporate services channel, primarily driven by new corporate client implementations and new grants and employee stock purchase plan transactions. Over this same period, domestic stock plan participants generated $3842 billion of net proceeds through transactions of vested assets. These participant proceeds represent a key source of net new assets for the retail customer channel.

Advisor Services

Through our proprietary technology platform, Liberty, the Company offers sophisticated modeling, rebalancing, reporting, and practice management capabilities that are fully customizable for the RIA. E*TRADE's financial consultants can refer retail customers to pre-qualified RIAs on our custody platform through our referral program, the E*TRADE Advisor Network, which is offered through our two national and 30 regional financial centers. We expect the E*TRADE Advisor Network will improve the Company's ability to drive asset growth and retain customers seeking specialized services and sophisticated advice.

Significant Events

Proposed merger with Morgan Stanley

On February 20, 2020, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Morgan Stanley under which Morgan Stanley agreed to acquire the Company in an all-stock transaction. The Company's shareholders approved the merger on July 17, 2020. The acquisition is subject to customary closing conditions, including regulatory approvals ~~and approval by the Company's shareholders~~, and is expected to close in the fourth quarter of 2020. Please refer to Note 2—Acquisitions and Restructuring for additional details.

Global economy disrupted asby COVID-19 ~~declared a~~ pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The Company responded by executing its business continuity plan and transitioning nearly all of its workforce to a remote working environment to prioritize the safety of its employees and customers. The pandemic, and actions taken by governmental authorities to contain its financial and economic impact, has resulted in significant market volatility, ~~with the Chicago Board Options Exchange Volatility Index (VIX) setting record levels~~ and ~~major indices entering bear market territory for the first time in over~~ a ~~decade, driving lower equity market valuations and a~~ significant reduction in interest rates. As a result, the Company experienced ~~lower margin balances and~~ sequential declines in net interest margin, net interest income and other related revenues. While these decreases were offset by increased trading-based revenues resulting from continued record customer engagement, we cannot be certain that such levels will persist should the scope and duration of the disruption be prolonged.

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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to provide stimulus to the US economy in the form of financial aid to individuals and business, among other groups. The CARES Act includes provisions for housing assistance, including mortgage forbearance and foreclosure relief for eligible borrowers. The CARES Act also provides relief from certain generally accepted accounting principles (GAAP) requirements, including guidance related to the classification of loan modifications as troubled debt restructurings (TDRs). The Company adopted the provisions of the CARES Act and related guidance issued by US banking agencies (interagency guidance) during the second quarter of 2020. Refer to Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies and Note 7—Loans Receivable and Allowance for Credit Losses for additional details.

Financial Performance

Our net revenue is generated primarily from net interest income, commissions and fees and service charges:

•Net interest income is largely impacted by the size of our balance sheet, our balance sheet mix, and average yields on our assets and liabilities. Net interest income is driven primarily from interest earned on investment securities, margin receivables, securities lending, and our legacy loan portfolio, less interest incurred on interest-bearing liabilities, including deposits, customer payables, corporate debt and other borrowings.

•Commissions revenue is generated by customer trades and is largely impacted by trade volume and trade type, specifically options contract charges.

•Fees and service charges revenue is primarily impacted by order flow revenue, fees earned from customer cash held by third parties, advisor management and custody fees, and mutual fund service fees.

Our net revenue is offset by non-interest expenses, the largest of which are compensation and benefits and advertising and market development.

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Key Performance Metrics

Management monitors customer activity and corporate metrics to evaluate the Company’s performance. The most significant of these are displayed below.

Customer Activity Metrics

Daily Average Revenue Trades (DARTs) is an important measure of customer trading activity and is a key driver of trading-based revenue. DARTs were ~~651~~1,~~746~~009,956 and ~~285~~834,~~004~~980 for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to 274,838 and ~~2019~~279,839 ~~respectively~~for the same periods in 2019. DARTs volume is impacted by market sentiment as well as volatility of the equity markets.

Derivative DARTs, a key component of overall DARTs that represents advanced trading activities by our customers, is the daily average number of options and futures trades, and Derivative DARTs percentage is the mix of options and futures trades as a component of total DARTs. We expect that options trades will be the primary driver of commissions revenue in future periods. Derivative DARTs were ~~186~~253,~~065~~320 and 91220,~~940~~465 for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to 91,358 and ~~2019~~91,644 ~~respectively~~for the same periods in 2019. Derivative DARTs represented 2925% and 3226% of total DARTs for the three and six months ended ~~March~~June 3130, 2020 ~~and 2019~~, respectively, compared to 33% for both of the same periods in 2019.

~~Margin~~E*TRADE ~~receivables~~Q2 ~~represent~~2020 ~~credit extended to customers to finance their purchases of securities by borrowing against securities they own and is a key driver of net interest income. Margin receivables were $7.3 billion and $~~10.3-Q ~~billion~~| atPage March 31, 2020 and 2019, respectively, contracting meaningfully in late March 2020 as equity market valuations decreased. Average margin receivables balances are significant drivers of net interest income. Average margin receivables were $9~~.4 billion and $9.8 billion for the three months ended March 31, 2020 and 2019, respectively.~~

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Margin receivables represent credit extended to customers to finance their purchases of securities by borrowing against securities they own and is a key driver of net interest income. Margin receivables were $9.4 billion and $9.9 billion at June 30, 2020 and 2019, respectively. Average margin receivables balances are significant drivers of net interest income. Average margin receivables were $8.0 billion and $8.7 billion for the three and six months ended June 30, 2020, respectively, compared to $10.1 billion and $9.9 billion for the same periods in 2019. The margin receivables balance increased during the three months ended June 30, 2020 as equity markets stabilized; however, a lower beginning balance, driven by decreases in equity market valuations in late March 2020, drove average margin receivables down relative to the prior period.

End of period accounts and net new accounts are indicators of our ability to attract and retain customers. Net new accounts represent gross new accounts less accounts attrited during the period. The following table presents end of period accounts by channel:

1Q 2020

4Q 2019

3Q 2019

2Q 2019

1Q 2019

2Q 2020

1Q 2020

4Q 2019

3Q 2019

2Q 2019

End of period retail accounts

5,825,265

5,498,596

5,169,757

~~5,498,596~~

5,130,138

~~5,169,757~~

5,122,669

~~5,130,138~~

~~5,122,669~~

~~5,088,597~~

End of period advisor services accounts

140,904

144,453

148,198

~~144,453~~

150,401

~~148,198~~

151,275

~~150,401~~

~~151,275~~

~~151,222~~

End of period corporate services accounts

1,979,907

1,946,956

1,908,836

~~1,946,956~~

1,893,881

~~1,908,836~~

1,853,875

~~1,893,881~~

~~1,853,875~~

~~1,817,983~~

End of period accounts

7,946,076

7,590,005

7,226,791

~~7,590,005~~

7,174,420

~~7,226,791~~

7,127,819

~~7,174,420~~

~~7,127,819~~

~~7,057,802~~

The following table presents net new accounts and annualized growth rates by channel:

							1Q 2020				4Q 2019				3Q 2019		2Q 2019		1Q 2019
	2Q 2020		1Q 2020		4Q 2019				3Q 2019				2Q 2019
Net new retail accounts	326,669		328,839		39,619		~~328,839~~		7,469		~~39,619~~		34,072		~~7,469~~		~~34,072~~		~~80,830~~
Net new advisor services accounts	(3,549)		(3,745)		(2,203)		~~(3,745)~~		(874)		~~(2,203)~~		53		~~(874)~~		53		~~(19)~~
Net new corporate services accounts	32,951		38,120		14,955		~~38,120~~		40,006		~~14,955~~		35,892		~~40,006~~		~~35,892~~		~~54,154~~
Net new accounts	356,071		363,214		52,371		~~363,214~~		46,601		~~52,371~~		70,017		~~46,601~~		~~70,017~~		~~134,965~~
Net new retail account growth rate	23.8	%	25.4	%	3.1	%	~~25.4~~	%	0.6	%	~~3.1~~	%	2.7	%	~~0.6~~	%	~~2.7~~	%	~~6.5~~	%
Net new advisor services account growth rate	(9.8)	%	(10.1)	%	(5.9)	%	~~(10.1)~~	%	(2.3)	%	~~(5.9)~~	%	0.1	%	~~(2.3)~~	%	~~0.1~~	%	~~(0.1)~~	%
Net new corporate services account growth rate	6.8	%	8.0	%	3.2	%	~~8.0~~	%	8.6	%	~~3.2~~	%	7.9	%	~~8.6~~	%	~~7.9~~	%	~~12.3~~	%
Net new total account growth rate	18.8	%	20.1	%	2.9	%	~~20.1~~	%	2.6	%	~~2.9~~	%	4.0	%	~~2.6~~	%	~~4.0~~	%	~~7.8~~	%

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Net new retail and advisor services assets equals total inflows to new and existing retail and advisor services accounts less total outflows from closed and existing retail and advisor services accounts. The net new retail and advisor services assets metric is a general indicator of the use of our products and services by new and existing retail and advisor services customers. Net new retail and advisor services assets exclude the effects of market movements in the value of retail and advisor services assets. Net new retail and advisor services assets were $1713.9 5 billion and $431.7 4 billion for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to $1.6 billion and $6.3 billion for the same periods in 2019,. ~~respectively,~~The increase from the prior year was as wea ~~experienced~~result of record customer engagement ~~during~~beginning in March 2020 and continuing through the ~~three~~end ~~months~~of ~~ended~~the ~~March~~second ~~31,~~quarter 2020. The following table presents annualized net new retail and advisor services assets growth rates:

	1Q 2020		4Q 2019		3Q 2019		2Q 2019		1Q 2019
	2Q 2020		1Q 2020		4Q 2019		3Q 2019		2Q 2019
Net new retail assets growth rate	2016.29	%	720.02	%	37.40	%	23.14	%	62.81	%
Net new advisor services assets growth rate	(72.1)	%	(27.31)	%	0(2.83)	%	(10.2)8	%	(31.52)	%
Net new retail and advisor services assets growth rate	1815.89	%	618.58	%	36.25	%	13.92	%	61.29	%

Total customer assets is an indicator of the value of our relationship with our customers. An increase generally indicates that the use of our products and services is expanding. Changes in this metric are also driven by changes in the valuations of our customers' underlying securities. The net ~~decrease~~increase in customer assets during the three months ended ~~March~~June 3130, 2020 was driven by ~~the~~continued ~~decline~~net innew ~~equity~~asset ~~market~~growth ~~valuations~~and ina ~~the~~relative ~~second~~stabilization ~~half~~of equity markets after the volatility of the first quarter 2020. The following table presents the significant components of total customer assets (dollars in billions):

1Q 2020

4Q 2019

3Q 2019

2Q 2019

1Q 2019

2Q 2020

1Q 2020

4Q 2019

3Q 2019

2Q 2019

Security holdings

~~253~~324.26

~~310~~253.72

~~284~~310.7

~~286~~284.67

~~279~~286.36

Cash and deposits

8492.62

7184.06

6571.0

6265.20

6162.72

Retail and advisor services assets

~~337~~416.8

~~381~~337.78

~~349~~381.7

~~348~~349.87

~~341~~348.08

Corporate services vested assets

~~135~~191.85

~~159~~135.18

~~138~~159.91

~~142~~138.39

~~140~~142.63

Retail, advisor services, and corporate services vested assets

~~473~~608.63

~~540~~473.86

~~488~~540.68

~~491~~488.16

~~481~~491.61

Corporate services unvested holdings

~~113~~173.75

~~136~~113.7

~~115~~136.47

~~117~~115.04

~~115~~117.40

Total customer assets

~~587~~781.38

~~677~~587.53

~~604~~677.05

~~608~~604.10

~~597~~608.01

E*TRADE Q1Q2 2020 10-Q | Page 11

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Customer cash and deposits is a significant component of total customer assets and is a key driver of net interest income as well as fees and service charges revenue, which includes fees earned on customer cash held by third parties. The following table presents the significant components of total customer cash and deposits (dollars in billions):

	1Q 2020		4Q 2019		3Q 2019		2Q 2019		1Q 2019
	2Q 2020		1Q 2020		4Q 2019		3Q 2019		2Q 2019
Sweep deposits:
Brokerage sweep deposits	$	3839.19	$	2738.91	$	3027.89	$	3130.78	$	3831.67
Bank sweep deposits(1)	0.72		60.47		—6.4		—		—
Customer payables	1615.07		1216.80		1112.28		1011.62		10.6
Savings, checking, and other banking assets(2)	3.36		43.3		94.63		89.6		78.76
Total on-balance sheet customer cash and deposits	5859.14		5158.41		51.64		5051.96		5650.9
Brokerage sweep deposits at unaffiliated financial institutions	1522.40		1615.94		1116.79		911.67		39.06
Bank sweep deposits at unaffiliated financial institutions(1)	98.17		09.81		—0.8		—		—
Money market funds and other	2.01		12.90		1.79		1.7		1.87
Total customer cash held by third parties(3)	2632.58		1926.65		1319.46		1113.34		411.83
Total customer cash and deposits	$	8492.62	$	7184.06	$	6571.0	$	6265.20	$	6162.72

(1)Beginning in Q4 2019, bank sweep deposits include Premium Savings Accounts participating in the newly established bank sweep deposit account program. Refer to MD&A—Balance Sheet Overview for additional information.

(2)Savings, checking, and other banking assets include $1.0 billion, $6.3 billion, and $5.1 billion, ~~and $3.8 billion~~ of deposits at December 31, 2019, September 30, 2019, and June 30, 2019, ~~and March 31, 2019,~~ respectively in our Premium Savings Account product. ~~These~~that ~~balances~~ were subsequently converted to ~~our~~the bank sweep deposit ~~account~~ program. ~~beginning~~There inwere Q4no ~~2019~~such ~~and~~balances ~~during~~at ~~the~~June ~~three~~30, ~~months~~2020 ~~ended~~or March 31, 2020~~, with all new Premium Savings Accounts now automatically enrolled in the program~~.

(3)Customer cash held by third parties is held outside E*TRADE and includes sweep deposit accounts and money market funds at unaffiliated financial institutions, net of deposit balances from unaffiliated institutions held on-balance sheet. Customer cash held by third parties is not reflected in the Company's consolidated balance sheet and is not immediately available for liquidity purposes.

The following table presents the average balances and net fees earned on brokerage and bank sweep deposits held at unaffiliated financial institutions (dollars in billions, fees in basis points):

	1Q 2020		4Q 2019		3Q 2019		2Q 2019		1Q 2019
	2Q 2020		1Q 2020		4Q 2019		3Q 2019		2Q 2019
Brokerage sweep deposits at unaffiliated financial institutions	$	1520.4	$	1415.74	$	1114.07	$	311.70	$	3.47
Brokerage sweep deposit fees(1)	~~148~~34		~~179~~148		~~218~~179		~~221~~218		221
Bank sweep deposits at unaffiliated financial institutions	$	59.52	$	05.35	$	—0.3	$	—	$	—
Bank sweep deposit fees(1)	815		68		—6		—		—

(1)Fees are net of interest paid.

E*TRADE Q1Q2 2020 10-Q | Page 12

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Corporate Metrics:

Diluted earnings per common share is the portion of a company's profit allocated to each diluted share of common stock and is a key indicator of the Company's profitability. Diluted earnings per common share was $0.7288 and $1.0961 for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to $0.90 and ~~2019,~~$2.00 ~~respectively~~for the same periods in 2019. See MD&A—Earnings Overview for further details.

Operating margin is the percentage of net revenue that results in income before income taxes and is an indicator of the Company's profitability. Operating margin was 3637% for both the three and 52six months ended June 30, 2020, respectively, compared to 43% and 48% for the same periods in 2019. Income before income tax expense and net revenue, the numerator and denominator in the operating margin calculation, included $80 million of losses from balance sheet repositioning for the three and six months ended ~~March~~June 3130, ~~2020~~2019, which resulted in a 6 percentage point reduction and ~~2019,~~a ~~respectively~~2 percentage point reduction in operating margin for the same periods.

Adjusted operating margin is a non-GAAP measure that provides useful information about our ongoing operating performance by excluding the provision (benefit) for credit losses, which is not viewed as a key factor governing our investment in the business and is excluded by management when evaluating operating margin performance. Adjusted operating margin was 37% for both the three and 50six months ended June 30, 2020, respectively, compared to 42% and 46% for the same periods in 2019. Adjusted income before income tax expense and net revenue, the numerator and denominator in the adjusted operating margin calculation, included $80 million of losses from balance sheet repositioning for the three and six months ended ~~March~~June 3130, ~~2020~~2019, which resulted in a 6 percentage point reduction and ~~2019,~~a ~~respectively~~3 percentage point reduction in adjusted operating margin for the same periods. See MD&A—Earnings Overview for a reconciliation of adjusted operating margin to operating margin.

~~Capital~~E*TRADE ~~return~~Q2 to shareholders represents the amount of earnings returned to shareholders through share repurchases and common stock dividends and Capital return percentage to shareholders is capital returned to shareholders as a percentage of net income available to common shareholders. Capital return to shareholders was $126 million and $1.2 billion for the three months ended March 31, 2020 ~~and~~10-Q ~~the~~| ~~year~~Page ended December 31, 2019, respectively, and included common stock dividends of $31 million and $135 million, respectively, for the same periods. Capital return percentage to shareholders was 78% and 133% for the same periods. The Company repurchased 2.1 million shares for $95 million during the three months 13

E*TRADE Q1 2020 10-Q | Page 13

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~~ended~~Return ~~March~~on ~~31,~~common ~~2020~~equity ~~prior~~is calculated by dividing net income available to ~~suspending~~common ~~share~~shareholders ~~repurchases~~by inaverage ~~connection~~common ~~with~~shareholders' equity, which excludes preferred stock. Return on common equity was 13% and 12% for the ~~proposed~~three ~~merger~~and ~~with~~six ~~Morgan~~months ~~Stanley.~~ended ~~The~~June ~~Company~~30, ~~also~~2020, ~~returned~~respectively, ~~capital~~compared to ~~shareholders~~15% inand 17% for the ~~form~~same ofperiods ~~shares~~in ~~withheld~~2019. ~~for~~Net ~~taxes~~income ofavailable ~~$13~~to ~~million~~common ~~and~~shareholders included $2080 million of losses from balance sheet repositioning for the three and six months ended ~~March~~June 3130, ~~2020~~2019, which had an after-tax impact of $59 million and ~~the~~resulted ~~year~~in ~~ended~~a ~~December~~4 ~~31,~~percentage ~~2019,~~point ~~respectively~~reduction and a 2 percentage point reduction in return on common equity for the same periods.

~~Return~~Adjusted return on common equity is a non-GAAP measure calculated by dividing adjusted net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. ~~Return~~Adjusted net income available to common shareholders is a non-GAAP measure which excludes the provision (benefit) for credit losses, which is not viewed as key factor governing our investment in the business and is excluded by management when evaluating return on common equity performance. Adjusted return on common equity was ~~11%~~13 and 1912% for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to 14% and 16% for the same periods in 2019. See MD&A—Earnings Overview for a reconciliation of adjusted net income available to common shareholders to net income and adjusted return on common equity to return on common equity. Adjusted net income available to common shareholders included $80 million of losses from balance sheet repositioning for the three and six months ended June 30, ~~respectively~~2019, which had an after-tax impact of $59 million and resulted in a 4 percentage point reduction and a 2 percentage point reduction in adjusted return on common equity for the same periods.

~~Adjusted~~Corporate ~~return~~cash, ~~on common equity is~~ a non-GAAP measure ~~calculated by dividing adjusted net income available to common shareholders by average common shareholders' equity~~, ~~which excludes preferred stock. Adjusted net income available to common shareholders~~ is a ~~non-GAAP~~component ~~measure~~of ~~which~~cash ~~excludes~~and ~~the~~equivalents ~~provision~~and ~~(benefit)~~represents ~~for~~the ~~credit~~primary ~~losses,~~source ~~which~~of iscapital ~~not~~above ~~viewed~~and asbeyond ~~key~~the ~~factor~~capital ~~governing~~deployed in our ~~investment~~regulated insubsidiaries. ~~the~~Cash ~~business~~ and isequivalents ~~excluded~~was by$436 ~~management~~million ~~when~~and ~~evaluating~~$380 ~~return~~million onat ~~common~~June ~~equity~~30, ~~performance.~~2020 ~~Adjusted~~and ~~return~~2019, onrespectively, ~~common~~while ~~equity~~corporate cash was ~~12%~~$377 million and ~~18%~~$323 million for the ~~three~~same ~~months ended March 31, 2020 and 2019, respectively~~periods. See MD&A—~~Earnings~~Liquidity ~~Overview~~and Capital Resources for a reconciliation of ~~adjusted~~corporate ~~net~~cash ~~income available~~ to ~~common~~cash ~~shareholders to net income~~ and ~~adjusted return on common equity to return on common equity~~equivalents.

~~Corporate~~E*TRADE ~~cash,~~Q2 a2020 ~~non~~10-~~GAAP~~Q ~~measure,~~| isPage a component of cash and equivalents and represents the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. Cash and equivalents was $1.1 billion and $523 million at March 31, 2020 and 2019, respectively, while corporate cash was $438 million and $329 million for the same periods. See MD&A—Liquidity and Capital Resources for a reconciliation of corporate cash to cash and equivalents.14

E*TRADE Q1 2020 10-Q | Page 14

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Average interest-earning assets, along with net interest margin, are indicators of our ability to generate net interest income. Average interest-earning assets were $5660.76 billion and $6158.06 billion for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to $61.4 billion and ~~2019,~~$61.2 billion ~~respectively~~for the same periods in 2019.

Net interest margin is a measure of the net yield on our average interest-earning assets. Net interest margin is calculated for a given period by dividing the annualized sum of net interest income by average interest-earning assets. Net interest margin was 2.8256% and 32.2369% for the three and six months ended ~~March~~June 3130, 2020, respectively compared to 3.20% and ~~2019,~~3.21% ~~respectively~~and for the same periods in 2019.

Tier 1 leverage ratio is an indicator of capital adequacy for E*TRADE Financial and E*TRADE Bank. Tier 1 leverage ratio is Tier 1 capital divided by adjusted average assets for leverage capital purposes. E*TRADE Financial's Tier 1 leverage ratio was 6.~~8% and 6.~~7% at ~~March~~both 31June 30, 2020 and 2019, respectively. E*TRADE Bank's Tier 1 leverage ratio was 7.42% and 7.13% at ~~March~~June 3130, 2020 and 2019, respectively. The internal threshold for E*TRADE Financial's Tier 1 leverage ratio is 6.5% and the internal threshold for E*TRADE Bank's Tier 1 leverage ratio is 7.0%. See MD&A—Liquidity and Capital Resources for additional information, including the calculation of regulatory capital ratios.

Total employees is the key driver of compensation and benefits expense, our largest non-interest expense category. Total employees were 4,~~116~~178 and 4,~~105~~261 at ~~March~~June 3130, 2020 and 2019, respectively.

E*TRADE Q1Q2 2020 10-Q | Page 15

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EARNINGS OVERVIEW

We generated net income of $~~181~~196 million and $377 million on total net revenue of $~~707~~716 million and $1.4 billion for the three and six months ended ~~March~~June 3130, 2020, respectively. The following chart presents a reconciliation of net income for the three months ended ~~March~~June 3130, 2019 to net income for the three months ended ~~March~~June 3130, 2020 (dollars in millions):

(1)Includes ~~advertising~~professional ~~and market development~~services, ~~professional~~occupancy ~~services~~and equipment, depreciation and amortization, FDIC insurance premiums, amortization of other intangibles, restructuring and acquisition-related activities and other non-interest expenses.

E*TRADE Q1Q2 2020 10-Q | Page 16

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The following table presents significant components of the consolidated statements of income (dollars in millions, except per share amounts):

										Three Months Ended March 31,						Variance
	Three Months Ended June 30,						Variance							Six Months Ended June 30,					Variance
									2020 vs. 2019									~~2020 vs. 2019~~		2020 vs. 2019
	2020		2019		Amount		%			2020		2019		Amount		%
Net interest income	$	388	$	490	$	(102)	(21)	%		$	~~400~~788	$	~~492~~982	$	(92194)	(1920)	%
Total non-interest income	328		195		133		68	%		~~307~~635		~~263~~458		44177		1739	%
Total net revenue	716		685		31		5	%		~~707~~1,423		~~755~~1,440		(4817)		(61)	%
Provision (benefit) for credit losses	(1)		(8)		7		(88)	%		65		(1220)		1825		*
Total non-interest expense	453		398		55		14	%		~~445~~898		~~375~~773		70125		1916	%
Income before income tax expense	264		295		(31)		(11)	%		~~256~~520		~~392~~687		(~~136~~167)		(3524)	%
Income tax expense	68		76		(8)		(11)	%		75143		~~102~~178		(2735)		(2620)	%
Net income	$	196	$	219	$	(23)	(11)	%		$	~~181~~377	$	~~290~~509	$	(~~109~~132)	(3826)	%
Preferred stock dividends	—		—		—		—	%		20		20		—		—	%
Net income available to common shareholders	$	196	$	219	$	(23)	(11)	%		$	~~161~~357	$	~~270~~489	$	(~~109~~132)	(4027)	%
Diluted earnings per common share	$	0.88	$	0.90	$	(0.02)	(2)	%		$	01.7261	$	12.0900	$	(0.3739)	(3420)	%

* Percentage not meaningful.

Net income decreased 3811% to $~~181~~196 million, or $0.7288 per diluted share, and 26% to $377 million, or $1.61 per diluted share, for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to the same ~~period~~periods in 2019. Net income available to common shareholders was $~~161~~196 million and $~~270~~357 million for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to $219 million and $489 million for the same periods in 2019,. ~~respectively,~~Net ~~which~~income ~~includes~~available ~~preferred~~to ~~stock~~common ~~dividends~~shareholders ofincluded $20 million in preferred stock dividends for both ~~periods~~the six months ended June 30, 2020 and 2019, respectively. The decrease in net income ~~was~~for the ~~result~~three ofmonths ~~lower~~ended ~~net~~June ~~revenues~~30, ~~higher~~2020 ~~provision~~was ~~for~~a ~~credit~~result ~~losses~~of ~~and~~ higher non-interest expense primarily due to increases in advertising and market development and clearing and servicing expense, partially offset by higher net revenues. The decrease in net income for the six months ended June 30, 2020 was the result of higher non-interest expense primarily driven by increased clearing and servicing, communications, advertising and market development, and restructuring and acquisition-related activities expenses, lower net revenues and ~~other~~a ~~non-interest~~provision ~~expense~~for ~~compared~~credit tolosses recorded during the ~~three~~six months ended ~~March~~June 3130, ~~2019.~~2020 as compared to a provision (benefit) for credit losses in the prior period.

Net Revenue

The following table presents the significant components of total net revenue (dollars in millions):

										Three Months Ended March 31,							Variance
	Three Months Ended June 30,						Variance							Six Months Ended June 30,						Variance
									2020 vs. 2019										~~2020 vs. 2019~~		2020 vs. 2019
	2020		2019		Amount		%			2020		2019			Amount		%
Net interest income	$	388	$	490	$	(102)	(21)	%		$	~~400~~788	$	~~492~~982		$	(92194)	(1920)	%
Commissions	89		121		(32)		(26)	%		71160		~~122~~243			(5183)		(4234)	%
Fees and service charges	205		126		79		63	%		~~203~~408		~~118~~244			85164		7267	%
Gains on securities and other, net										20		11			9		82	%
Gains (losses) on securities and other, net	23		(64)		87		*			43		(53)			96		*
Other revenue	11		12		(1)		(8)	%		1324		1224			1—		8—	%
Total non-interest income	328		195		133		68	%		~~307~~635		~~263~~458			44177		1739	%
Total net revenue	$	716	$	685	$	31	5	%		$	~~707~~1,423	$	~~755~~1,440		$	(4817)	(61)	%

E*~~TRADE~~ Percentage Q1not ~~2020 10-Q | Page 17~~meaningful.

E*TRADE Q2 2020 10-Q | Page 17

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Net Interest Income

Net interest income decreased 1921% to $~~400~~388 million and 20% to $788 million for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to the same ~~period~~periods in 2019. Net interest income is earned primarily through investment securities, margin receivables, securities lending, and our legacy loan portfolio, offset by funding costs.

The following tables present average balance sheet data and interest income and expense data, as well as related net interest margin, yields, and rates (dollars in millions):

	Three Months Ended March 31,
	Three Months Ended June 30,
	2020										2019
	Average Balance		Interest Inc./Exp.		Average Yield/Cost		Average Balance		Interest Inc./Exp.		Average Yield/Cost
Cash and equivalents	$	~~767~~633	$	2—	10.0114	%	$	~~607~~452	$	3	2.3133	%
Cash segregated under federal or other regulations	2,586		8		1.26	%	986		6		2.63	%
Cash and investments segregated under federal or other regulations	5,467		3		0.20	%	871		6		2.63	%
Investment securities	4143,~~033~~571		~~285~~272		2.7850	%	4647,~~968~~375		~~365~~368		3.1011	%
Margin receivables	98,~~361~~039		9468		43.0440	%	910,~~766~~084		~~126~~130		5.2417	%
Loans(1)	1,~~564~~515		2116		54.3618	%	21,~~058~~920		28		5.4875	%
Broker-related receivables and other	1,~~351~~379		4—		10.2413	%	~~632~~659		43		2.2423	%
Total interest-earning assets	5660,~~662~~604		~~414~~359		2.9337	%	61,~~017~~361		~~532~~538		3.5051	%
Other interest revenue(2)	—		2950				—		2322
Total interest-earning assets	5660,~~662~~604		~~443~~409		32.1370	%	61,~~017~~361		~~555~~560		3.6566	%
Total non-interest-earning assets	67,~~673~~172						45,~~991~~093
Total assets	$	6367,~~335~~776					$	66,~~008~~454
Sweep deposits:
Brokerage sweep deposits	$	3136,~~641~~684	$	52	0.0602	%	$	3837,~~433~~380	$	2018	0.2120	%
Bank sweep deposits(3)	~~3,307~~232		13—		10.6313	%	—		—		—	%
Savings deposits	21,~~234~~692		3—		0.4501	%	46,~~968~~347		1523		1.2247	%
Other deposits	1,~~603~~700		—		0.02	%	1,~~785~~732		—		0.03	%
Customer payables	1416,~~076~~921		41		0.1302	%	10,~~462~~593		98		0.3431	%
Broker-related payables and other	~~836~~976		—		0.0301	%	~~999~~1,050		1		0.4946	%
Other borrowings	56		1		*		~~269~~312		24		3.8178	%
Corporate debt	1,411		1413		3.8687	%	1,~~409~~410		14		34.9106	%
Total interest-bearing liabilities	5559,~~113~~622		4017		0.2911	%	58,~~325~~824		6168		0.4247	%
Other interest expense(4)	—		34				—		2
Total interest-bearing liabilities	5559,~~113~~622		4321		0.3114	%	58,~~325~~824		6370		0.4448	%
Total non-interest-bearing liabilities	1,~~861~~461						1,~~183~~016
Total liabilities	5661,~~974~~083						59,~~508~~840
Total shareholders' equity	6,~~361~~693						6,~~500~~614
Total liabilities and shareholders' equity	$	6367,~~335~~776					$	66,~~008~~454
Excess interest earning assets over interest bearing liabilities/net interest income/net interest margin	$	~~1,549~~982	$	~~400~~388	2.8256	%	$	2,~~692~~537	$	~~492~~490	3.2320	%

* Percentage not meaningful.

(1)Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual loans are recognized on a cash basis in interest income until it is doubtful that full payment will be collected, at which point payments are applied to principal.

(2)Other interest revenue is earned on certain securities loaned balances. Interest expense incurred on other securities loaned balances is presented on the broker-related payables and other line item above.

(3)Beginning in Q4 2019, bank sweep deposits include Premium Savings Accounts participating in the newly established bank sweep deposit account program. Refer to MD&A—Balance Sheet Overview for additional information.

(4)Other interest expense is incurred on certain securities borrowed balances. Interest income earned on other securities borrowed balances is presented on the broker-related receivables and other line item above.

E*TRADE Q1Q2 2020 10-Q | Page 18

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Average interest-earning assets decreased 7% to $56.7 billion for the three months ended March 31, 2020 compared to the same period in 2019. The fluctuation in average interest-earning assets is generally driven by changes in average interest-bearing liabilities, primarily deposits and customer payables. Average interest-bearing liabilities decreased 6% to $55.1 billion for the three months ended March 31, 2020 compared to the same period in 2019 due to the following:


	Six Months Ended June 30,
	2020										2019
	Average Balance		Interest Inc./Exp.		Average Yield/ Cost		Average Balance		Interest Inc./Exp.		Average Yield/ Cost
Cash and equivalents	$	700	$	2	0.62	%	$	529	$	6	2.32	%
Cash and investments segregated under federal or other regulations	4,027		11		0.54	%	928		12		2.63	%
Investment securities	42,302		557		2.63	%	47,172		733		3.11	%
Margin receivables	8,700		162		3.75	%	9,926		256		5.21	%
Loans⁽¹⁾	1,539		37		4.78	%	1,989		56		5.61	%
Broker-related receivables and other	1,365		4		0.68	%	646		7		2.24	%
Total interest-earning assets	58,633		773		2.64	%	61,190		1,070		3.51	%
Other interest revenue⁽²⁾	—		79				—		45
Total interest-earning assets	58,633		852		2.91	%	61,190		1,115		3.66	%
Total non-interest-earning assets	6,923						5,043
Total assets	$	65,556					$	66,233

Sweep deposits:
Brokerage sweep deposits	$	34,162	$	7	0.04	%	$	37,904	$	38	0.20	%
Bank sweep deposits⁽³⁾	1,770		13		1.53	%	—		—		—	%
Savings deposits	1,963		3		0.26	%	5,661		38		1.36	%
Other deposits	1,652		—		0.02	%	1,758		—		0.03	%
Customer payables	15,498		5		0.07	%	10,528		17		0.32	%
Broker-related payables and other	906		—		0.02	%	1,025		2		0.47	%
Other borrowings	6		2		*		291		6		3.80	%
Corporate debt	1,411		27		3.87	%	1,409		28		3.98	%
Total interest-bearing liabilities	57,368		57		0.20	%	58,576		129		0.44	%
Other interest expense⁽⁴⁾	—		7				—		4
Total interest-bearing liabilities	57,368		64		0.22	%	58,576		133		0.46	%
Total non-interest-bearing liabilities	1,661						1,099
Total liabilities	59,029						59,675
Total shareholders' equity	6,527						6,558
Total liabilities and shareholders' equity	$	65,556					$	66,233
Excess interest earning assets over interest bearing liabilities/net interest income/net interest margin	$	1,265	$	788	2.69	%	$	2,614	$	982	3.21	%

~~•Deposits~~* Percentage ~~and~~not ~~customer payables: The decrease in sweep deposits was primarily driven by the balance sheet repositioning during the second quarter of 2019, as we moved $6~~meaningful.6 billion of deposits to third-party banks. The decrease in savings deposits was primarily driven by the conversion of Premium Savings Accounts into the bank sweep deposit program beginning in Q4 2019. These decreases were partially offset by increased customer payables as a result of increased customer engagement during the three months ended March 31, 2020. Refer to MD&A—Balance Sheet Overview for additional information.

Average interest-earning assets decreased 1% to $60.6 billion and 4% to $58.6 billion for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019. The fluctuation in average interest-earning assets is generally driven by changes in average interest-bearing liabilities, primarily deposits and customer payables, which increased 1% to $59.6 billion and decreased 2% to $57.4 billion for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019 due to the following:

E*TRADE Q2 2020 10-Q | Page 19

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•Deposits and customer payables: The decrease in sweep deposits was primarily driven by the balance sheet repositioning during the second quarter of 2019, as we moved $6.6 billion of deposits to third-party banks. The decrease in savings deposits was primarily driven by the conversion of Premium Savings Accounts into the bank sweep deposit program beginning in Q4 2019. These decreases were partially offset by increased customer payables as a result of increased customer engagement during the three and six months ended June 30, 2020. Refer to MD&A—Balance Sheet Overview for additional information.

•Other interest-bearing liabilities: The decrease in broker-related payables and other borrowings was driven by customer activity and short-term liquidity needs at E*TRADE Bank and E*TRADE Securities.

Net interest margin decreased 4164 basis points to 2.8256% and 52 basis points to 2.69% for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to the same ~~period~~periods in 2019. Net interest margin is driven primarily by the mix of average asset and liability balances and the interest rates earned or paid on those balances. The decrease during the ~~three~~six months ended ~~March~~June 3130, 2020 iswas due to a lower interest rate environment, including the impact of actions taken by the Federal Reserve to contain the financial and economic impact of the COVID-19 pandemic, partially offset by other interest revenue and expense earned on securities lending. The decrease in interest income for the three and six months ended ~~March~~June 3130, 2020 is primarily the result of lower average interest earning assets, asset mix, and the lower interest rate environment as compared to the same ~~period~~periods in 2019.

Commissions

Commissions revenue decreased 4226% to $7189 million and 34% to $160 million for the three and six months ended ~~March~~June 3130, 2020 compared to the same ~~period~~periods in 2019. The decrease was primarily related to the elimination of retail commissions on US listed stock, ETF, and options trades in October 2019. ~~The~~Prior to this date, the primary factors ~~that~~affecting ~~affect~~ commissions revenue ~~are~~were DARTs, derivative DARTs, trade type, and the number of trading days. We expect the majority of commissions revenue in future periods will be driven from options contract charges. For additional information see MD&A—Overview.

DARTs volume increased ~~129~~267% to ~~651~~1,~~746~~009,956 and 198% to 834,980 for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to the same ~~period~~periods in 2019. DARTs volume is impacted by market sentiment as well as volatility of the equity markets, which ~~increased~~was elevated during the three and six months ended ~~March~~June 3130, 2020. Derivative DARTs volume increased ~~102~~177% to ~~186~~253,~~065~~320 and 141% to 220,465 for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to the same ~~period~~periods in 2019.

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Fees and Service Charges

The following table presents the significant components of fees and service charges (dollars in millions):

										Three Months Ended March 31,							Variance
	Three Months Ended June 30,						Variance							Six Months Ended June 30,						Variance
									2020 vs. 2019										~~2020 vs. 2019~~		2020 vs. 2019
	2020		2019		Amount		%			2020		2019			Amount		%
Order flow revenue	$	120	$	45	$	75	167	%		$	85205	$	4388		$	42117	98133	%
Money market funds and sweep deposits revenue(1)	22		23		(1)		(4)	%		6082		2144			3938		~~186~~86	%
Advisor management and custody fees	19		19		—		—	%		1938		1837			1		63	%
Mutual fund service fees	10		13		(3)		(23)	%		1323		1225			1(2)		(8)	%
Foreign exchange revenue	9		8		1		13	%		918		816			12		13	%
Reorganization fees	12		7		5		71	%		416		613			~~(2)~~3		~~(33)~~23	%
Other fees and service charges	13		11		2		18	%		1326		1021			35		3024	%
Total fees and service charges	$	205	$	126	$	79	63	%		$	~~203~~408	$	~~118~~244		$	85164	7267	%

(1)Includes revenue earned on average customer cash held by third parties based on the federal funds rate or LIBOR plus a negotiated spread or other contractual arrangements with the third-party institutions.

Fees and service charges increased 7263% to $~~203~~205 million and 67% to $408 million for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to the same ~~period~~periods in 2019. The increase was primarily driven by higher order flow revenue, ~~due~~resulting tofrom ~~market~~record ~~volatility~~customer engagement during the three and ~~record~~six ~~customer~~months ~~engagement~~ended June 30, ~~and~~2020. ~~higher~~Higher money market funds and sweep deposits revenue during the six months ended June 30, 2020 was due to higher average customer cash held by third parties resulting from the balance sheet repositioning in Q2the second quarter of 2019 and customer cash growth during the ~~three~~six months ended ~~March~~June 3130, 2020, offset by lower net yields earned on customer cash due to the lower interest rate environment.

~~Gains~~E*TRADE onQ2 ~~Securities~~2020 ~~and~~10-Q ~~Other,~~| ~~Net~~Page 21

~~The~~Table ~~following table presents the significant components~~ of ~~gains on securities and other, net (dollars in millions):~~Contents

	Three Months Ended March 31,						Variance
									2020 vs. 2019
	2020		2019		Amount		%
Gains on available-for-sale securities	$	19	$	11	$	8	73	%
Equity method investment income and other	1		—		1		100	%
Gains on securities and other, net	$	20	$	11	$	9	82	%

Gains (Losses) on Securities and Other, Net

The following table presents the significant components of gains (losses) on securities and other, net (dollars in millions):


	Three Months Ended June 30,						Variance							Six Months Ended June 30,				Variance
									2020 vs. 2019										2020 vs. 2019
	2020		2019		Amount		%			2020		2019		Amount		%
Gains (losses) on available-for-sale securities, net:
Gains on available-for-sale securities	$	38	$	15	$	23	153	%		$	57	$	26	$	31	119	%
Losses on available-for-sale securities	(15)		(80)		65		81	%		(15)		(80)		65		81	%
Subtotal	23		(65)		88		*			42		(54)		96		*
Equity method investment income and other	—		1		(1)		(100)	%		1		1		—		—	%
Gains (losses) on securities and other, net	$	23	$	(64)	$	87	*			$	43	$	(53)	$	96	*

* Percentage not meaningful.

In June 2020, the Company sold $571 million of investment securities due to market conditions. Gains (losses) on securities and other, net includes $15 million of losses related to these sales. In June 2019, the Company sold $4.5 billion of lower-yielding investment securities at losses as it repositioned its balance sheet during the second quarter. Gains (losses) on securities and other, net includes $80 million of losses related to these sales in the second quarter of 2019. See MD&A—Overview, MD&A—Balance Sheet Overview and Note 6—Available-for-Sale and Held-to-Maturity Securities for additional information.

Provision (Benefit) for Credit Losses

We recognized a provision (benefit) for credit losses of $6(1) million for the three months ended ~~March~~June 3130, 2020 and a provision for credit losses of $5 million for the six months ended June 30, 2020, respectively, as compared to a provision (benefit) for credit losses of $(8) million and $12(20) million for the ~~three~~same ~~months~~periods ~~ended~~in ~~March 31,~~ 2019. The Company adopted amended accounting guidance related to accounting for credit losses on January 1, 2020. The timing and magnitude of the provision (benefit) for credit losses is affected by many factors that could result in variability. Changes in management's reasonable and supportable forecasts of estimated credit losses and collateral valuations, as well as the impact of actual charge-offs net of recoveries, will drive variability in provision (benefit) for credit losses in future periods. For additional information on management's estimate of the allowance for credit losses, see Note 7—Loans Receivable and Allowance for Credit Losses.

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Non-Interest Expense

The following table presents the significant components of non-interest expense (dollars in millions):

										Three Months Ended March 31,						Variance
	Three Months Ended June 30,						Variance							Six Months Ended June 30,					Variance
									2020 vs. 2019									~~2020 vs. 2019~~		2020 vs. 2019
	2020		2019		Amount		%			2020		2019		Amount		%
Compensation and benefits	$	176	$	168	$	8	5	%		$	~~168~~344	$	~~164~~332	$	412	24	%
Advertising and market development	64		48		16		33	%		56120		54102		218		418	%
Clearing and servicing	47		32		15		47	%		4491		3062		1429		47	%
Professional services	30		26		4		15	%		2353		2248		15		510	%
Occupancy and equipment	37		32		5		16	%		3673		3264		49		1314	%
Communications	35		29		6		21	%		2964		1544		1420		9345	%
Depreciation and amortization	24		21		3		14	%		2347		2142		25		1012	%
FDIC insurance premiums	3		4		(1)		(25)	%		47		48		—(1)		—(13)	%
Amortization of other intangibles	15		15		—		—	%		1530		1530		—		—	%
Restructuring and acquisition-related activities	2		—		2		100	%		1618		—		1618		100	%
Other non-interest expenses	20		23		(3)		(13)	%		3151		1841		1310		7224	%
Total non-interest expense	$	453	$	398	$	55	14	%		$	~~445~~898	$	~~375~~773	$	70125	1916	%

Compensation and Benefits

Compensation and benefits expense increased 5% to $176 million and 4% to $344 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019. This increase was primarily driven by increased incentive compensation as compared to the prior periods.

Advertising and Market Development

Advertising and market development expense increased 33% to $64 million and 18% to $120 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019. This increase was related primarily to increased promotions related to efforts to attract new customers as compared to the prior periods.

Clearing and Servicing

Clearing and servicing expense increased 47% to $4447 million and $91 million for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to the same ~~period~~periods in 2019. This increase for the six months ended June 30, 2020 was related primarily to increased customer engagement and trading volume resulting from the market volatility experienced during the ~~three~~six months ended ~~March~~June 3130, 2020.

Communications

Communications expense increased 9321% to $2935 million and 45% to $64 million for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to the same ~~period~~periods in 2019. The increase during the three months ended June 30, 2020 was primarily driven by increased customer activity, while the increase during the six months ended June 30, 2020 was driven by a $14 million benefit related to a change in estimate for previous market data usage during the three months ended March 31, 2019.

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Restructuring and Acquisition-Related Activities

Restructuring and acquisition-related activities expense ~~increased~~of ~~100%~~$2 tomillion and $1618 million for the three and six months ended ~~March~~June 3130, 2020, asrespectively, ~~compared~~was todriven ~~the~~by ~~same~~costs ~~period~~incurred in ~~2019.~~connection ~~Restructuring~~with ~~and acquisition-related activities expense for~~ the ~~three~~proposed ~~months~~merger ~~ended~~with ~~March~~Morgan ~~31,~~Stanley. ~~2020~~There was ~~driven~~no ~~primarily~~restructuring byand ~~costs~~acquisition-related ~~incurred~~activities inexpense ~~connection~~during ~~with~~ the ~~proposed~~three ~~merger~~or ~~with~~six ~~Morgan~~months ~~Stanley~~ended June 30, 2019. Refer to Note 2—Acquisitions and Restructuring for additional information.

Other Non-Interest Expenses

Other non-interest expenses decreased 13% to $20 million and increased 7224% to $3151 million for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to the same ~~period~~periods in 2019. The decrease during the three months ended June 30, 2020 was primarily driven by lower meetings and events expenses as compared to the prior period. The increase during the six months ended June 30, 2020 was primarily driven by impairment of certain technology assets as a result of project cancellations during the three months ended March 31, 2020 as compared to the prior year.

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Operating Margin

Operating margin was 3637% for both the three and six months ended ~~March~~June 3130, 2020, respectively, compared to 5243% and 48% for the same ~~period~~periods in 2019. Adjusted operating margin, a non-GAAP measure, was 37% for both the three and six months ended ~~March~~June 3130, 2020, respectively, compared to 5042% and 46% for the same ~~period~~periods in 2019.

Adjusted operating margin is calculated by dividing adjusted income before income tax expense by total net revenue. Adjusted income before income tax expense, a non-GAAP measure, excludes provision (benefit) for credit losses. The following table presents a reconciliation of adjusted income before income tax expense and adjusted operating margin, non-GAAP measures, to the most directly comparable GAAP measures (dollars in millions):

									Three Months Ended March 31,
	Three Months Ended June 30,														Six Months Ended June 30,
	2020						2019		~~2020~~				2020		~~2019~~		2019
	Amount		Operating Margin %		Amount		Operating Margin %		Amount		Operating Margin %		Amount		Operating Margin %
Income before income tax expense / operating margin									$	256	36	%	$	392	52	%
Income before income tax expense / operating margin(1)	$	264	37	%	$	295	43	%	$	520	37	%	$	687	48	%
Provision (benefit) for credit losses	(1)				(8)				65				(1220)
Adjusted income before income tax expense / adjusted operating margin									$	262	37	%	$	380	50	%
Adjusted income before income tax expense / adjusted operating margin(1)	$	263	37	%	$	287	42	%	$	525	37	%	$	667	46	%

(1)Income before income tax expense and adjusted income before income tax expense included $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which resulted in a 6 percentage point reduction and a 2 percentage point reduction in operating margin and a 6 percentage point reduction and a 3 percentage point reduction in adjusted operating margin for the same periods.

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Return on Common Equity

Return on common equity was 1113% and 12% for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to 1915% and 17% for the same ~~period~~periods in 2019. Adjusted return on common equity, a non-GAAP measure, was 13% and 12 % for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to 1814% and 16% for the same ~~period~~periods in 2019.

Adjusted return on common equity is calculated by dividing adjusted net income available to common shareholders by average common shareholders' equity, which excludes preferred stock. Adjusted net income available to common shareholders, a non-GAAP measure, excludes the after-tax impact of the provision (benefit) for credit losses. The following table provides a reconciliation of GAAP net income available to common shareholders and return on common equity percentage to non-GAAP adjusted net income available to common shareholders and adjusted return on common equity percentage (dollars in millions):

									Three Months Ended March 31,
	Three Months Ended June 30,													Six Months Ended June 30,
	2020						2019		~~2020~~			2020		~~2019~~		2019
	Amount		Return on Common Equity %		Amount		Return on Common Equity %		Amount		Return on Common Equity %	Amount		Return on Common Equity %
Net income available to common shareholders and return on common equity									$	161	11%	$	270	19	%
Net income available to common shareholders and return on common equity(1)	$	196	13	%	$	219	15	%	$	357	12%	$	489	17	%
Add back impact of the following items:
Add back impact of the following item:
Provision (benefit) for credit losses	(1)				(8)				65			(1220)
Income tax impact	—				2				(21)			35
Net of tax	(1)				(6)				4			(915)
Adjusted net income available to common shareholders and return on common equity									$	165	12%	$	261	18	%
Adjusted net income available to common shareholders and return on common equity(1)	$	195	13	%	$	213	14	%	$	361	12%	$	474	16	%

(1)Net income available to common shareholders and adjusted net income available to common shareholders includes $80 million of losses from balance sheet repositioning for the three and six months ended June 30, 2019, which had an after-tax impact of $59 million and resulted in a 4 percentage point reduction and 2 percentage point reduction to return on common equity and adjusted return on common equity for the same periods.

Income Tax Expense

Income tax expense was $7568 million and $~~102~~143 million for the three and six months ended ~~March~~June 3130, 2020, respectively, compared to $76 million and ~~2019,~~$178 ~~respectively~~million for the same periods in 2019. The effective tax rate was 2926% and 2627% for the three and six months ended June 30, 2020, respectively, ~~for~~compared ~~the~~to ~~same~~26% for both periods in 2019. The increase in the effective tax rate for the ~~three~~six months ended ~~March~~June 3130, 2020 related primarily to discrete state tax expenses recognized during the period.

E*TRADE Q1Q2 2020 10-Q | Page 2225

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BALANCE SHEET OVERVIEW

The following table presents the significant components of the consolidated balance sheets (dollars in millions):

							Variance
	March 31,		December 31,		2020 vs. 2019
	June 30,		December 31,		2020 vs. 2019
	2020		2019		Amount		%
Assets:
Cash and equivalents	$	~~1,105~~436	$	750	$	~~355~~(314)	47(42)	%
Segregated cash	5,730		1,879		3,851		205	%
Segregated cash and investments	5,570		1,879		3,691		196	%
Investment securities	4647,~~530~~174		41,470		5,~~060~~704		1214	%
Margin receivables	79,~~251~~422		9,675		(~~2,424~~253)		(253)	%
Loans receivable, net	1,~~634~~608		1,595		3913		21	%
Receivables from brokers, dealers and clearing organizations	1,~~124~~128		1,395		(~~271~~267)		(19)	%
Property and equipment, net	~~339~~356		339		—17		—5	%
Goodwill and other intangibles, net	2,~~928~~914		2,943		(1529)		(1)	%
Other assets	1,~~215~~763		1,370		~~(155)~~393		~~(11)~~29	%
Total assets	$	6770,~~856~~371	$	61,416	$	68,~~440~~955	1015	%
Liabilities and shareholders’ equity:
Deposits	$	4243,~~146~~667	$	38,606	$	35,~~540~~061	913	%
Customer payables	15,~~960~~671		12,849		32,~~111~~822		2422	%
Payables to brokers, dealers and clearing organizations	~~776~~1,524		893		~~(117)~~631		~~(13)~~71	%
Corporate debt	1,~~411~~412		1,410		12		—	%
Other liabilities	1,~~044~~277		1,115		~~(71)~~162		~~(6)~~15	%
Total liabilities	6163,~~337~~551		54,873		68,~~464~~678		1216	%
Shareholders’ equity	6,~~519~~820		6,543		~~(24)~~277		—4	%
Total liabilities and shareholders’ equity	$	6770,~~856~~371	$	61,416	$	68,~~440~~955	1015	%

Cash and Equivalents

Cash and equivalents ~~increased~~decreased 4742% to $~~1.1~~436 ~~billion~~million during the ~~three~~six months ended ~~March~~June 3130, 2020. Cash and equivalents will fluctuate based on a variety of factors, including, among other drivers, liquidity needs at the parent, customer activity at our regulated subsidiaries, and the timing of investments at E*TRADE Bank. For additional information on our use of cash and equivalents, see MD&A—Liquidity and Capital Resources and the Consolidated Statements of Cash Flows.

~~Segregated~~E*TRADE ~~Cash~~Q2 2020 10-Q | Page 26

Cash segregated under federal or other regulations increased 205% to $5.7 billion during the three months ended March 31, 2020. The level of segregated cash is driven primarily by customer payables and securities lending balances we hold as liabilities compared with the amount of margin receivables and securities borrowed balances we hold as assets. The excess represents customer cash that we segregate for the exclusive benefit of our brokerage customers. Segregated cash can also be impacted by the level of securities purchased under agreements to resell between E*TRADE Securities and E*TRADE Bank, representing investments that were also segregated under federal or other regulations by E*TRADE Securities and eliminated in consolidation, which increased $2.1 billion to $4.0 billion as of March 31, 2020.

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Segregated Cash and Investments

Cash and investments segregated under federal or other regulations increased 196% to $5.6 billion during the six months ended June 30, 2020. The level of segregated cash is driven primarily by customer payables and securities lending balances we hold as liabilities compared with the amount of margin receivables and securities borrowed balances we hold as assets. The excess represents customer cash that we segregate for the exclusive benefit of our brokerage customers. Segregated cash and investments can also be impacted by the level of securities purchased under agreements to resell between E*TRADE Securities and E*TRADE Bank, representing investments that were also segregated under federal or other regulations by E*TRADE Securities and eliminated in consolidation, which increased $0.8 billion to $2.7 billion as of June 30, 2020. Segregated cash and investments also included securities purchased under agreements to resell between E*TRADE Securities and third parties in the amount of $2.6 billion at June 30, 2020.

Investment Securities

The following table presents the significant components of investment securities (dollars in millions):

							Variance
	March 31,		December 31,		2020 vs. 2019
	June 30,		December 31,		2020 vs. 2019
	2020		2019		Amount		%
Available-for-sale securities:
Agency mortgage-backed securities	$	1715,~~449~~635	$	17,035	$	~~414~~(1,400)	2(8)	%
Other agency debt securities	965		659		306		46	%
Agency debentures	1,255		659		596		90	%
US Treasuries	1,~~343~~323		1,227		~~116~~96		98	%
Non-agency debt securities(1)	1,~~683~~779		580		1,~~103~~199		~~190~~207	%
Total available-for-sale securities	$	2119,~~440~~992	$	19,501	$	~~1,939~~491	103	%
Held-to-maturity securities:
Agency mortgage-backed securities	$	2325,~~531~~579	$	20,085	$	35,~~446~~494	1727	%
Other agency debt securities	1,~~559~~603		1,884		(~~325~~281)		(1715)	%
Total held-to-maturity securities	$	2527,~~090~~182	$	21,969	$	35,~~121~~213	1424	%
Total investment securities	$	4647,~~530~~174	$	41,470	$	5,~~060~~704	1214	%

(1)Includes non-agency asset-backed securities (ABS) and non-agency commercial mortgage-backed securities.

Investment securities increased 1214% to $4647.52 billion during the ~~three~~six months ended ~~March~~June 3130, 2020 consistent with growth of on balance sheet customer cash and deposits during the period. The non-agency portfolio increased ~~190~~207% to $1.78 billion during the period as the Company made advantageous purchases given market volatility. Securities represented 6967% and 68% of total assets at ~~March~~June 3130, 2020 and December 31, 2019, respectively. We classify debt securities as available-for-sale or held-to-maturity based on our investment strategy and management’s assessment of our intent and ability to hold the debt securities until maturity.

Margin Receivables

Margin receivables decreased 253% to $79.34 billion during the ~~three~~six months ended ~~March~~June 3130, 2020. Margin receivables ~~contracted~~balances stabilized during the three months ended June 30, 2020 after contracting meaningfully in late March 2020 as a result of market volatility and lower equity market valuations.

E*TRADE Q1Q2 2020 10-Q | Page 2427

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Loans Receivable, Net

The following table presents the significant components of loans receivable, net (dollars in millions):

							Variance
	March 31,		December 31,		2020 vs. 2019
	June 30,		December 31,		2020 vs. 2019
	2020		2019		Amount		%
One- to four-family	$	~~755~~714	$	803	$	(4889)	(611)	%
Home equity	~~594~~550		635		(4185)		(613)	%
Securities-based lending(1)	~~195~~258		169		2689		1553	%
Total loans receivable	1,~~544~~522		1,607		(6385)		(45)	%
Unamortized premiums, net	4		5		(1)		(20)	%
Subtotal	1,~~548~~526		1,612		(6486)		(45)	%
Allowance for credit losses(2)	8682		(17)		~~103~~99		*
Total loans receivable, net	$	1,~~634~~608	$	1,595	$	3913	21	%

* Percentage not meaningful.

(1)E*TRADE Line of Credit is a securities-based lending product where customers can borrow against the market value of their securities pledged as collateral. The unused credit line amount totaled $~~569~~1.1 ~~million~~billion and $431 million as of ~~March~~June 3130, 2020 and December 31, 2019, respectively.

(2)The Company adopted amended accounting guidance related to accounting for credit losses on January 1, 2020. Prior year amounts related to the allowance for loan losses were not restated as the amended accounting guidance was adopted on a modified retrospective basis. See Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies for further details.

Loans receivable decreased 45% to $1.5 billion during the ~~three~~six months ended ~~March~~June 3130, 2020 ~~due~~driven toby continued runoff in our mortgage loan portfolio offset by ~~increased~~increases in securities-based lending. The allowance for credit losses was an $8682 million "negative allowance," which reflects the Company's adoption of the amended accounting guidance ~~effective~~on January 1, 2020 offset by the provision expense and net recoveries during the period. Loans receivable, net increased 1% to $1.6 billion during the six months ended June 30, 2020 driven primarily by the "negative allowance" for credit losses and by increases in securities-based lending. For additional information on management's estimate of the allowance for credit losses, see Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies and Note 7—Loans Receivable and Allowance for Credit Losses.

We expect the remaining legacy mortgage loan portfolio to continue its run-off for the foreseeable future. As our portfolio has seasoned and substantially all interest-only loans have converted to amortizing, we continue to assess underlying performance, the economic environment, and the value of the portfolio in the marketplace. While it is our intention to continue to hold these loans, our strategy could change subject to market conditions.

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Receivables from and Payables to Brokers, Dealers and Clearing Organizations

The following table presents the significant components of receivables from and payables to brokers, dealers and clearing organizations (dollars in millions):

							Variance
	March 31,		December 31,		2020 vs. 2019
	June 30,		December 31,		2020 vs. 2019
	2020		2019		Amount		%
Receivables:
Securities borrowed	$	~~507~~430	$	1,003	$	(~~496~~573)	(4957)	%
Receivables from clearing organizations	~~499~~525		297		~~202~~228		6877	%
Other	~~118~~173		95		2378		2482	%
Total	$	1,~~124~~128	$	1,395	$	(~~271~~267)	(19)	%
Payables:
Securities loaned	$	~~696~~1,409	$	838	$	~~(142)~~571	~~(17)~~68	%
Payables to clearing organizations	2359		10		1349		~~130~~490	%
Other	5756		45		1211		2724	%
Total	$	~~776~~1,524	$	893	$	~~(117)~~631	~~(13)~~71	%

Securities borrowed decreased 4957% to $~~507~~430 million during the ~~three~~six months ended ~~March~~June 3130, 2020. The decrease was primarily driven by decreased demand for cash from our counterparties. The 6877% increase in receivables from clearing organizations during the ~~three~~six months ended ~~March~~June 3130, 2020 to $~~499~~525 million was primarily driven by higher collateral requirements as a result of increased customer trading activity.

Securities loaned ~~decreased~~increased 1768% to $~~696~~1.4 ~~million~~billion during the ~~three~~six months ended ~~March~~June 3130, 2020. The ~~decrease~~increase was primarily driven by ~~lower~~higher demand for securities from our counterparties. For additional information on E*TRADE Securities liquidity, see MD&A—Liquidity and Capital Resources.

Deposits

The following table presents the significant components of deposits (dollars in millions):

							Variance
	March 31,		December 31,		2020 vs. 2019
	June 30,		December 31,		2020 vs. 2019
	2020		2019		Amount		%
Sweep deposits:
Brokerage sweep deposits	$	3839,~~095~~924	$	27,949	$	1011,~~146~~975	3643	%
Bank sweep deposits(1)	~~680~~169		6,355		(56,~~675~~186)		(8997)	%
Savings deposits(2)	1,~~667~~728		2,592		(~~925~~864)		(3633)	%
Other deposits	1,~~704~~846		1,710		~~(6)~~136		—8	%
Total deposits	$	4243,~~146~~667	$	38,606	$	35,~~540~~061	913	%

(1)Beginning Q4 2019, bank sweep deposits include Premium Savings Accounts participating in the newly established bank sweep deposit account program.

(2)Savings deposits include $1.0 billion of deposits at December 31, 2019 in our Premium Savings Account product that were subsequently converted to the bank sweep deposit account program. All new Premium Savings Accounts are now automatically enrolled in the program.

Deposits represented 69% and 70% of total liabilities at ~~March~~June 3130, 2020 and December 31, 2019, respectively. Deposits increased by 913% to $4243.17 billion during the ~~three~~six months ended ~~March~~June 3130, 2020. This net increase was due primarily to an increase in brokerage sweep deposits as a result of increased customer engagement ~~during~~and the ~~period,~~conversion ~~offset~~of bycustomer apayable ~~decrease~~balances ininto ~~bank~~brokerage sweep ~~deposits~~deposit ~~due to a planned~~

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accounts during the period, offset by a decrease in bank sweep deposits due to a planned movement to third parties and a decrease in savings deposits as a result of the conversion of $1.0 billion of Premium Savings Account balances into the bank sweep deposit account program during the period.

We offer the following sweep deposit account programs to customers which utilize our bank subsidiaries, in combination with additional third-party program banks, as applicable:

•Extended insurance sweep deposit account (ESDA) program

•Retirement sweep deposit account (RSDA) program for retirement plan customers

•Cash balance program offered by E*TRADE Savings Bank for uninvested cash held in eligible custodial accounts as part of the advisor services offering

•Bank sweep deposit account program offered by E*TRADE Bank for Premium Savings Account holders

Our sweep deposit programs are designed to offer up to $1.25 million in FDIC coverage for individual accounts ($2.5 million for joint accounts). The bank sweep deposit program, which launched in Q4 2019, provides the Company with the ability to transfer amounts held on deposit in E*TRADE Bank Premium Savings Accounts to an FDIC-insured account at one or more participating banks if desired. As the bank sweep deposit program was established to allow for reciprocal deposits, E*TRADE Bank may also accept deposits from customers of the participating third-party banks. Bank sweep deposits included $1.0 billion of reciprocal deposits received from third-party banks at December 31, 2019. As of ~~March~~June 3130, 2020, the Company has no such deposits. See MD&A—Earnings Overview and Note 9—Deposits for additional information.

As of ~~March~~June 3130, 2020, approximately 98% of sweep deposits were in these programs. Sweep deposits on balance sheet are held at bank subsidiaries and are included in the deposits line item on our consolidated balance sheets.


LIQUIDITY AND CAPITAL RESOURCES

We have established liquidity and capital policies to support the successful execution of our business strategy, while maintaining ongoing and sufficient liquidity through the business cycle. We believe liquidity is of critical importance to the Company and especially important for E*TRADE Bank and E*TRADE Securities. The objective of our policies is to ensure that we can meet our corporate, banking and broker-dealer liquidity needs under both normal operating conditions and under periods of stress in the financial markets.

Liquidity

Our liquidity needs are primarily driven by capital needs at E*TRADE Bank and E*TRADE Securities, interest due on our corporate debt, dividend payments on our preferred stock and other capital returns to holders of our common stock. Our banking and brokerage subsidiaries' liquidity needs are driven primarily by the level and volatility of our customer activity. Management maintains a set of liquidity sources and monitors certain business trends and market metrics closely in an effort to ensure we have sufficient liquidity. Potential loans by E*TRADE Bank or E*TRADE Savings Bank to the parent company or the parent company's other non-bank subsidiaries are subject to various quantitative, arm’s length, collateralization, capital and other requirements.

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Parent Company Liquidity

The parent company's primary source of liquidity is corporate cash. Corporate cash, a non-GAAP measure, is a component of cash and equivalents; see the Consolidated Statements of Cash Flows for information on cash and equivalents activity. We define corporate cash as cash held at the parent company and subsidiaries, excluding bank, broker-dealer, and FCM subsidiaries that require regulatory approval or notification prior to the payment of certain dividends to the parent company. Corporate cash includes the parent company's deposits placed with E*TRADE Bank. E*TRADE Bank may use these deposits for investment purposes; however, these investments are not included in consolidated cash and equivalents.

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 is monitored as part of our liquidity risk management. Our current corporate cash target is $300 million and covers approximately 18 months of parent company fixed costs, which include corporate overhead costs, preferred stock dividends, corporate debt interest, and, as applicable, contractual corporate debt maturities over the next 12 months. Parent company fixed costs are defined as minimum expenditures required to operate the business and exclude controllable, or variable costs. The Company maintains additional liquidity through a $300 million unsecured committed revolving credit facility. The parent has the ability to borrow against the credit facility for working capital and general corporate purposes. Dividends from our operating subsidiaries, including E*TRADE Bank and E*TRADE Securities, are additional sources of corporate cash. Subject to regulatory approval or notification, capital generated by these subsidiaries could be distributed to the parent company to the extent the excess capital levels exceed both regulatory capital requirements and internal capital thresholds. As of ~~March~~June 3130, 2020, our subsidiaries maintained excess regulatory capital over internal thresholds and paid dividends of $50250 million to the parent company during the ~~three~~six months ended ~~March~~June 3130, 2020.

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The following chart presents a roll forward of the key activities impacting corporate cash ~~and provides a roll forward of corporate cash~~ from December 31, 2019 to ~~March~~June 3130, 2020 (dollars in millions):

The following table presents a reconciliation of consolidated cash and equivalents to corporate cash, a non-GAAP measure (dollars in millions):

	March 31, 2020		December 31, 2019
	June 30, 2020		December 31, 2019
Consolidated cash and equivalents	$	~~1,105~~436	$	750
Less: Cash at regulated subsidiaries	(~~1,094~~404)		(716)
Add: Cash on deposit at E*TRADE Bank(1)	~~427~~345		611
Corporate cash	$	~~438~~377	$	645

(1)Corporate cash includes the parent company's deposits placed with E*TRADE Bank. E*TRADE Bank may use these deposits for investment purposes; however, these investments are not included in consolidated cash and equivalents.

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Corporate cash decreased $~~207~~268 million to $~~438~~377 million during the ~~three~~six months ended ~~March~~June 3130, 2020 due to the following:

•$50250 million of dividends received from our brokerage subsidiary

•$12313 million ~~received~~used ~~from~~primarily ~~tax~~for ~~refunds~~parent company overhead, ~~net~~including ofboth ~~payments~~fixed and ~~subsidiary~~variable costs, less reimbursements from subsidiaries under cost sharing arrangements and the impact of cash activity at other non-regulated subsidiaries. Parent company overhead also includes a loan of $180 million made to E*TRADE Securities on June 30, 2020 which was repaid the following day

•$107 million used primarily for parent company overhead, including both fixed and variable costs, less reimbursements from subsidiaries under cost sharing arrangements and the impact of cash activity at other non-regulated subsidiaries

•$95 million used for share repurchases

•$5182 million used for dividends, including $3162 million in common stock dividends and $20 million in preferred stock dividends

•$1626 million used for interest on corporate debt

•$2 million used for tax payments, net of refunds and subsidiary reimbursements

E*TRADE Bank Liquidity

E*TRADE Bank, including its subsidiary E*TRADE Savings Bank, relies primarily on deposits for liquidity needs. Management believes that within deposits, sweep deposits are of particular importance as they are a stable source of liquidity for E*TRADE Bank. The vast majority of E*TRADE Bank's liquidity is invested in securities backed by the US government or its agencies, representing highly liquid securities with low credit risk.

We may also utilize wholesale funding sources for short-term liquidity and contingency funding requirements. Our ability to borrow these funds is dependent upon the continued availability of funding in the wholesale borrowings market. In addition, we can borrow from the Federal Reserve Bank of Richmond's discount window to meet short-term liquidity requirements, although it is not viewed as a primary source of funding.

E*TRADE Securities Liquidity

E*TRADE Securities relies primarily on customer payables and securities lending to provide liquidity and to fund margin lending. E*TRADE Securities maintains additional liquidity through external lines of credit totaling approximately $1.32 billion. E*TRADE Securities also maintains lines of credit with the parent company and E*TRADE Bank. E*TRADE Securities had borrowed $180 million from its line of credit with the parent company at June 30, 2020 which was repaid the following day.

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External Liquidity Sources

The following table presents the Company's external lines of credit at ~~March~~June 3130, 2020 (dollars in millions):

Description	Maturity Date	Borrower	Outstanding		Available
Senior unsecured, committed revolving credit facility(1)	June 2024	ETFC	$	—	$	300
FHLB secured credit facility	Determined at trade	ETB	$	—	$	65,~~430~~960
Federal Reserve Bank discount window	Overnight	ETB	$	—	$	1,~~245~~077
Senior unsecured, committed revolving credit facility(2)	June ~~2020~~2021	ETS	$	—	$	~~600~~550
Secured, committed lines of credit	June ~~2020~~2021	ETS	$	—	$	175
Unsecured, uncommitted lines of credit	June 2020	ETS	$	—	$	50
Unsecured, uncommitted lines of credit	None	ETS	$	—	$	75
Secured, uncommitted lines of credit	None	ETS	$	—	$	425

(1)The senior unsecured committed revolving credit facility contains certain covenants, including maintenance covenants related to the Company's interest coverage, leverage and regulatory net capital ratios with which the Company was in compliance at ~~March~~June 3130, 2020.

(2)On June 19, 2020, E*TRADE Securities entered into a 364-day, $550 million senior unsecured committed revolving credit facility, which replaced its 364-day senior unsecured committed revolving credit facility entered into on June 21, 2019. The senior unsecured committed revolving credit facility contains certain covenants, including maintenance covenants related to E*TRADE Securities' minimum consolidated tangible net worth and regulatory net capital ratio with which the Company was in compliance at ~~March~~June 3130, 2020.

Capital Resources

The Company seeks to manage capital levels in support of our business strategy of generating and effectively deploying capital, governed by the Company's risk management framework. For additional information on our bank and brokerage capital requirements, refer to Note 13—Regulatory Requirements.

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Bank Capital Requirements

At ~~March~~June 3130, 2020, our regulatory capital ratios for E*TRADE Financial and E*TRADE Bank were above the minimum ratios required to be "well capitalized." Currently, the internal threshold for E*TRADE Financial's Tier 1 leverage ratio is 6.5% and the internal threshold for E*TRADE Bank's Tier 1 leverage ratio is 7.0%. For additional information on bank regulatory requirements refer to Note 13—Regulatory Requirements.

The following table presents E*TRADE Financial and E*TRADE Bank's capital ratios (dollars in millions):

	E*TRADE Financial									E*TRADE Bank
	March 31, 2020			December 31, 2019			March 31, 2020			December 31, 2019
	June 30, 2020			December 31, 2019			June 30, 2020			December 31, 2019
Shareholders’ equity	$	6,~~519~~820		$	6,543		$	3,~~529~~758		$	3,488
Deduct:
Preferred stock	(689)			(689)			—			—
Common Equity Tier 1 capital before regulatory adjustments	$	56,~~830~~131		$	5,854		$	3,~~529~~758		$	3,488
Add:
Losses in other comprehensive income on available-for-sale debt securities, net of tax	~~168~~42			28			~~168~~42			28
Deduct:
Goodwill and other intangible assets, net of deferred tax liabilities	(2,~~456~~433)			(2,466)			(~~273~~270)			(276)
Disallowed deferred tax assets	(5242)			(70)			(43)			—
Common Equity Tier 1 capital	$	3,~~490~~698		$	3,346		$	3,~~420~~527		$	3,240
Add:
Preferred stock	689			689			—			—
Tier 1 capital	$	4,~~179~~387		$	4,035		$	3,~~420~~527		$	3,240
Add:
Other	—			25			—			17
Total capital	$	4,~~179~~387		$	4,060		$	3,~~420~~527		$	3,257
Average assets for leverage capital purposes	$	6367,~~515~~722		$	60,968		$	4649,~~544~~247		$	45,320
Deduct:
Goodwill and other intangible assets, net of deferred tax liabilities	(2,~~456~~433)			(2,466)			(~~273~~270)			(276)
Disallowed deferred tax assets	(5242)			(70)			(43)			—
Adjusted average assets for leverage capital purposes	$	6165,~~007~~247		$	58,432		$	4648,~~267~~974		$	45,044
Total risk-weighted assets(1)	$	1112,~~920~~569		$	10,635		$	910,~~554~~094		$	8,872
Tier 1 leverage ratio (Tier 1 capital / Adjusted average assets for leverage capital purposes)	6.87		%	6.9		%	7.42		%	7.2		%
Common Equity Tier 1 capital / Total risk-weighted assets(1)	29.34		%	31.5		%	3534.89		%	36.5		%
Tier 1 capital / Total risk-weighted assets	3534.19		%	37.9		%	3534.89		%	36.5		%
Total capital / Total risk-weighted assets	3534.19		%	38.2		%	3534.89		%	36.7		%

(1)Under the regulatory guidelines for risk-based capital, on-balance sheet assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor or, if relevant, the guarantor or the nature of any collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with that category. The resulting weighted values from each of the risk categories are aggregated for determining total risk-weighted assets.

Broker-Dealer and FCM Capital Requirements

Our broker-dealer and FCM subsidiaries are subject to capital requirements determined by their respective regulators. At ~~March~~June 3130, 2020, these subsidiaries met their minimum net capital requirements. We continually assess our ability to distribute excess net capital to the parent while maintaining adequate capital at the broker-dealer and FCM subsidiaries. For additional information on our broker-dealer and FCM capital requirements, refer to Note 13—Regulatory Requirements.

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Off-Balance Sheet Arrangements

We enter into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of our customers and to reduce our own exposure to interest rate risk. These arrangements include firm commitments to extend credit. Additionally, we enter into guarantees and other similar arrangements as part of transactions in the ordinary course of business. For additional information on these arrangements, refer to Note 14—Commitments, Contingencies and Other Regulatory Matters.


RISK MANAGEMENT

The identification, mitigation and management of existing and potential risks is critical to effective enterprise risk management. There are certain risks inherent to our industry and certain risks that will surface through the conduct of our business operations. We seek to monitor and manage our significant risk exposures by operating under a set of Board-approved limits and by monitoring certain risk indicators. Our governance framework is designed to comply with applicable requirements and requires regular reporting on metrics and significant risks and exposures to senior management and the ~~Board~~board of ~~Directors~~directors.

We face the following key types of risks: credit, liquidity, market, operational, strategic, reputational, as well as legal and regulatory. We have a Board-approved Enterprise Risk Appetite Statement (RAS) that specifies significant risk exposures and addresses the Company's tolerance for these risks, which are described in further detail within Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2019.

We are also subject to other risks that could affect our business, financial condition, results of operations or cash flows in future periods. For additional information see Part II. Item 1A. — Risk Factors.

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CONCENTRATIONS OF CREDIT RISK

Credit risk is the risk of loss arising from the inability or failure of a borrower or counterparty to meet its credit obligations. Our mortgage loan portfolio represents our most significant credit risk exposure.

•One- to Four-Family Interest-Only Loans and Home Equity Loans: One- to four-family loans include loans with a five to ten-year interest-only period, followed by an amortizing period ranging from 20 to 25 years. The home equity loan portfolio consists of home equity installment loans (HEILs) and home equity lines of credit (HELOCs) and is primarily second lien loans on residential real estate properties that have a higher level of credit risk than first lien mortgage loans. HEILs are primarily fixed rate and fixed term, fully amortizing loans that do not offer the option of an interest-only payment. The majority of HELOCs had an interest-only draw period at origination and converted to amortizing loans at the end of the draw period, which typically ranged from five to ten years. At ~~March~~June 3130, 2020, all of the one-to four-family loans were amortizing and substantially all of the HELOC portfolio had converted from the interest-only draw period. These conversions mitigate the risk associated with these loans; however, the Company is still exposed to ~~the~~ risk if the borrowers fail to perform or if prolonged disruption to the global economy as a result of the COVID-19 pandemic impairs our customers’ ability to fulfill their credit obligations.

~~The~~In ~~Coronavirus Aid~~addition, ~~Relief,~~certain ~~and~~borrowers ~~Economic~~have ~~Security~~requested ~~Act~~forbearance (under the CARES Act) ~~was~~during ~~enacted~~the onthree ~~March~~months 27ended June 30, 2020. toThese ~~provide~~modifications ~~stimulus~~are togenerally ~~the~~intended USto ~~economy~~provide inshort-term ~~the~~relief; ~~form~~however, ofwe ~~financial~~may ~~aid~~be exposed to ~~individuals~~credit ~~and~~risk ~~businesses,~~if ~~among~~the ~~other~~relief ~~groups.~~is ~~The~~not ~~CARES~~sufficient ~~Act~~and ~~includes~~the ~~provisions~~borrowers ~~for~~fail ~~housing~~to ~~assistance,~~perform ~~including~~as ~~mortgage~~a ~~forbearance~~result ~~and~~of ~~foreclosure~~continued ~~relief~~disruption to ~~eligible~~the ~~individuals~~global economy. ~~The~~For ~~Company~~additional isinformation ~~currently~~see ~~evaluating these provisions~~MD&A—Overview, ~~working~~Note ~~with~~7—Loans ~~its~~Receivable ~~third-party~~and ~~servicers~~Allowance tofor ~~respond~~Credit toLosses, ~~customer requests~~ and ~~assessing~~Part ~~the~~II. ~~potential~~Item ~~impact~~IA. toRisk ~~the Company’s exposure to credit risk in future periods~~Factors.

•Securities: We focus primarily on security type and credit rating to monitor credit risk in our securities portfolios. We consider securities backed by the US government or its agencies to have low credit risk as the long-term debt rating of the US government is AA+ by S&P and Aaa by Moody’s at ~~March~~June 3130, 2020. The amortized cost of these securities accounted for 96% of our total securities portfolio at ~~March~~June 3130, 2020. We review the remaining debt securities that were not backed by the US government or its agencies according to their credit ratings from S&P and Moody’s where available, and all such debt securities were rated investment grade at ~~March~~June 3130, 2020.

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SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies in Part II. Item 8. Financial Statements and Supplementary Data in our Annual Report on Form 10-K for the year ended December 31, 2019 contains a summary of our significant accounting policies. The discussion below and in Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies includes updates for newly adopted GAAP. Many of the significant accounting policies require the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes for the periods presented. We believe that, of our significant accounting policies, the following are critical because they are based on estimates and assumptions that require complex and subjective judgments by management: allowance for credit losses; valuation and impairment of goodwill and acquired intangible assets; and income taxes. Changes in these estimates or assumptions could materially impact our financial condition and results of operations, and actual results could differ from our estimates. Our critical accounting policies are more fully described in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Summary of Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2019.

Valuation and Impairment of Goodwill and Acquired Intangible Assets

The valuation of goodwill and acquired intangible assets requires significant judgment and estimates by management. Management also applies judgment in conducting impairment testing for goodwill and finite lived intangible assets, including in making estimates of fair value based on the income or market approach and estimates required to determine the useful lives of finite lived intangible assets. The Company evaluated its goodwill and finite lived intangible assets for impairment as of 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. No impairment was indicated ~~at March 31, 2020~~ as a result of this analysis. Prolonged disruption to the economy as a result of the pandemic, and any resulting volatility in the market, ~~could~~or ~~continue to put~~ pressure on equity market valuations, including our own, ~~which~~ could result in impairment of goodwill in future periods.

Adoption of New Accounting Standards

Accounting for Credit Losses

In June 2016, the Financial Accounting Standards Board (FASB) amended the guidance on accounting for credit losses, requiring 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. The FASB has subsequently issued clarifications and improvements, including clarification that the current expected credit losses (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. The amended guidance became effective for the Company beginning January 1, 2020.

The Company recognized an after-tax benefit related to mortgage loans of $84 million as an adjustment to opening retained earnings at adoption on January 1, 2020. 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. See Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies for additional information.

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Determining the CECL allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. The CECL allowance is based on assumptions about quantitative and qualitative factors, and changes to the allowance may result if future conditions differ from these assumptions. For example, in the event the cash received through liquidation or other form of recovery for collateral-dependent loans is less than the fair value of collateral less estimated costs to sell, additional losses may be recognized. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the CECL allowance in future periods. Our underlying assumptions and judgments could prove to be inaccurate, which could impact our regulatory capital position and results of operations in future periods.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about market risk includes forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of certain factors, including, but not limited to, those set forth in Part I. Forward Looking Statements and Part II. Item 1A. Risk Factors in this Quarterly Report and Part I. Item 1A. Risk Factors in the Annual Report on Form 10-K for the year ended December 31, 2019.

Interest Rate Risk

Our exposure to interest rate risk is related primarily to interest-earning assets and interest-bearing liabilities. Managing interest rate risk is essential to profitability. The primary objective of interest rate risk management is to control exposure to interest rates within the Board-approved limits and with limited exposure to earnings volatility resulting from interest rate fluctuations. Our general strategies to manage interest rate risk include balancing variable-rate and fixed-rate assets and liabilities and utilizing derivatives to help manage exposures to changes in interest rates. Exposure to interest rate risk requires management to make complex assumptions regarding maturities, market interest rates and customer behavior. Changes in interest rates, including the following, could impact interest income and expense:

•Interest-earning assets and interest-bearing liabilities may re-price at different times or by different amounts, creating a mismatch.

•The yield curve may steepen, flatten or otherwise change shape, which could affect the spread between short- and long-term rates. Widening or narrowing spreads could impact net interest income.

•Market interest rates may influence prepayments, resulting in maturity mismatches. In addition, prepayments could impact yields as premiums and discounts amortize.

Exposure to interest rate risk is dependent upon the distribution and composition of interest-earning assets, interest-bearing liabilities and derivatives. The differing risk characteristics of each product are managed to mitigate our exposure to interest rate fluctuations. At ~~March~~June 3130, 2020, 91% of our total assets were interest-earning assets and we had no securities classified as trading.

At ~~March~~June 3130, 2020, 6159% of total assets were available-for-sale and held-to-maturity mortgage-backed securities and residential real estate loans. The values of these assets are sensitive to changes in interest rates as well as expected prepayment levels. As interest rates increase, fixed-rate residential mortgages and mortgage-backed securities tend to exhibit lower prepayments. The inverse is true in a falling rate environment.

When real estate loans or mortgage-backed securities are prepaid, unamortized premiums and/or discounts are recognized immediately in interest income. Depending on the timing of the prepayment, these adjustments to income would impact anticipated yields. The Company reviews estimates of the impact of changing market rates on prepayments. This information is incorporated into our interest rate risk management strategy.

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Our liability structure consists of two central sources of funding: deposits and customer payables, both of which re-price at management’s discretion. We may utilize securities lending and wholesale funding sources as needed for short-term liquidity and contingency funding requirements.

Derivative Instruments

We use derivative instruments to help manage interest rate risk using designated hedge relationships. Interest rate swaps involve the exchange of fixed-rate and variable-rate interest payments between two parties based on a contractual underlying notional amount, but do not involve the exchange of the underlying notional amounts. See Note 8—Derivative Instruments and Hedging Activities for additional information about our use of derivative contracts.

Scenario Analysis

Scenario analysis is an advanced approach to estimating interest rate risk exposure. The Company monitors interest rate risk using the Economic Value of Equity (EVE) approach and the Earnings-at-Risk (EAR) approach.

Under the EVE approach, the present value of expected cash flows of all existing interest-earning assets, interest-bearing liabilities, derivatives and forward commitments are estimated and combined to produce an EVE figure. The change in EVE is a long-term sensitivity measure of interest rate risk. The approach values only the current balance sheet in which the most significant assumptions are the prepayment rates of the loan and mortgage-backed securities portfolios and the repricing of deposits. This approach does not incorporate assumptions related to business growth, or liquidation and reinvestment of instruments. This approach provides an indicator of future earnings and capital levels because changes in EVE indicate the anticipated change in the value of future cash flows. The sensitivity of this value to changes in interest rates is then determined by applying alternative interest rate scenarios. The change in EVE amounts fluctuate based on instantaneous parallel shifts in interest rates primarily due to the change in timing of cash flows, which considers prepayment estimates, in the Company’s residential loan and mortgage-backed securities portfolios.

EAR is a short-term sensitivity measure of interest rate risk and illustrates the impact of alternative interest rate scenarios on net interest income, including corporate interest expense, over a twelve month time frame. In measuring the sensitivity of net interest income to changes in interest rates, we assume instantaneous parallel interest rate shocks applied to the forward curve. In addition, we assume that cash flows from loan payoffs are reinvested in mortgage-backed securities, we exclude revenue from off-balance sheet customer cash and we assume no balance sheet growth.

The following table presents the sensitivity of EVE and EAR at the consolidated E*TRADE Financial level (dollars in millions):

Instantaneous Parallel Change in Interest Rates (basis points)	Economic Value of Equity																					Earnings-at-Risk
			March 31, 2020									December 31, 2019									March 31, 2020				December 31, 2019
			June 30, 2020									December 31, 2019									June 30, 2020				December 31, 2019
			Amount			Percentage			Amount			Percentage			Amount			Percentage			Amount			Percentage
+200	$	~~767~~504		~~14.~~9.7	%		$	(217)		(3.6)	%		$	~~355~~421		2632.0	%		$	246		15.8	%
+100	$	~~691~~473		139.51	%		$	39		0.6	%		$	~~198~~230		1417.54	%		$	140		9.0	%
+50	$	~~398~~284		75.85	%		$	96		1.6	%		$	~~105~~117		78.79	%		$	83		5.3	%
-50	$	(~~346~~231)		(64.74)	%		$	(200)		(3.3)	%		$	(6556)		(4.83)	%		$	(103)		(6.6)	%

We actively manage interest rate risk. As interest rates change, we will adjust our strategy and mix of assets, liabilities and derivatives to optimize our interest rate risk position. For example, a 100 basis points increase in rates may not result in a change in value as indicated above. We compare the instantaneous parallel interest rate changes in EVE and EAR to the established limits set by the board of directors in order to assess interest rate risk. In the event that the percentage change in EVE or EAR exceeds the Board limits, our Chief Executive Officer, Chief Risk Officer, Chief Financial Officer and Treasurer must all be

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promptly notified in writing and decide upon a plan of remediation. In addition, the board of directors must be notified of the exception and the planned resolution. At ~~March~~June 3130, 2020 the EVE and EAR percentage changes were within our Board limits.

Market Risk

Equity Securities Risk

We are indirectly exposed to equity securities risk in connection with securities collateralizing margin receivables and amounts borrowed under our E*TRADE Line of Credit, a securities-based lending product, as well as risk related to our securities lending and borrowing activities. We manage risk on margin and securities-based lending by requiring customers to maintain collateral in compliance with internal and, as applicable, regulatory guidelines. We monitor required margin levels daily and require our customers to deposit additional collateral, or to reduce positions, when necessary. We continuously monitor customer accounts to detect excessive concentration, large orders or positions, and other activities that indicate increased risk to us. We manage risks associated with our securities lending and borrowing activities by requiring credit approvals for counterparties, by monitoring the market value of securities loaned and collateral values for securities borrowed on a daily basis and requiring additional cash as collateral for securities loaned or return of collateral for securities borrowed when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation.

Non-Agency Debt Securities Risk

During the fourth quarter of 2018, we expanded our RAS and updated our investment policies to permit investments in high-credit quality non-agency securities that include commercial mortgage-backed securities and ABS. We are exposed to risk in connection with the investments in non-agency commercial mortgage-backed and non-agency ABS, the latter of which are collateralized by credit card, automobile loan and student loan receivables at ~~March~~June 3130, 2020. While our current non-agency investments are typically limited to senior classes, we may be exposed to a higher level of credit risk in the future if we purchase non-senior classes of notes. We manage risk with respect to non-agency securities by performing pre-purchase due diligence to assess collateral quality, transaction structure, cash flow sensitivity, and overall transaction risk. The results of the due diligence are reviewed and approved prior to purchase and the related investment performance is monitored monthly to assess any risk or other trends that emerge.

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KEY TERMS

Active trader—Customers that execute 30 or more trades per quarter.

Adjusted operating margin—A non-GAAP measure calculated by dividing adjusted income before income tax expense by total net revenue. Adjusted income before income tax expense, a non-GAAP measure, excludes provision (benefit) for credit losses and losses on early extinguishment of debt, as applicable.

Adjusted return on common equity—A non-GAAP measure calculated by dividing adjusted net income available to common shareholders, a non-GAAP measure which excludes the provision (benefit) for credit losses and losses on early extinguishment of debt, as applicable, by average common shareholders' equity, which excludes preferred stock.

Agency—US Government sponsored enterprises and federal government and other agencies, such as the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Government National Mortgage Association, the Small Business Administration, the Export-Import Bank, Federal Home Loan Bank and the Federal Farm Credit Bank.

Asset-backed securities (ABS)—Debt securities backed by financial assets such as credit cards, automobile loans, student loans or other receivables.

Basel III—Global regulatory standards for bank capital adequacy and liquidity as issued by the international Basel Committee on Banking Supervision.

Basis point—One one-hundredth of a percentage point.

Capital return percentage to shareholders—Represents the amount of earnings returned to shareholders through share repurchases and common stock dividends as a percentage of net income available to common shareholders.

CECL—Current expected credit losses.

CFTC—Commodity Futures Trading Commission.

Charge-off—The result of removing a loan or portion of a loan from the Company's balance sheet because the loan is considered to be uncollectible, for example, when a loan balance is reduced to its collateral value, less estimated costs to sell, or fully charged-off.

CLTV—Combined loan-to-value ratio.

Collateral-dependent—A loan for which foreclosure is probable or a loan where repayment is expected to be provided substantially through the sale of the underlying collateral when the borrower is experiencing financial difficulty.

Common Equity Tier 1 capital—A measurement of the Company's core equity capital used in the calculation of capital adequacy ratios. Common Equity Tier 1 capital equals: total shareholders' equity, less preferred stock and related surplus, plus/(less) unrealized losses (gains) on certain available-for-sale securities, less goodwill and certain other intangible assets, less certain disallowed deferred tax assets and subject to certain other applicable adjustments.

Consolidated financial statements—Refers to the consolidated financial statements prepared in accordance with GAAP as included in the Company's Annual Report on Form 10-K and the condensed consolidated financial statements included in the Company's Quarterly Reports on Form 10-Q.

Corporate cash—~~Cash~~A non-GAAP measure which includes 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 or notification.

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Customer account—Retail and advisor services accounts are defined as those with a minimum balance of $25 or a trade within the prior six months. Corporate services accounts are defined as those holding any type of vested or unvested securities from a corporate services client company or with a trade in the prior six months.

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Customer assets—Market value of all customer assets held by the Company including security holdings, customer cash and deposits, and corporate services vested and unvested equity and option holdings.

Customer-directed trades—Includes all customer-directed trades, including trades associated with no-transaction-fee mutual funds, options trades through the Dime Buyback Program, and all ETF transactions (including those formerly classified as commission-free).

Daily average revenue trades (DARTs)—Total customer-directed trades in a period divided by the number of trading days during that period.

Derivative—A financial instrument or other contract which includes one or more underlying securities, notional amounts, or payment provisions. The contract generally requires no initial net investment and is settled on a net basis.

Derivative DARTs—Customer-directed options and futures trades in a period divided by the number of trading days during that period.

Dime Buyback Program—A program that allows customers to manage and protect capital by allowing them to close short options without commissions or contract fees.

Earnings at risk (EAR)—The sensitivity of net interest income to changes in interest rates over a twelve month horizon. It is a short-term measurement of interest rate risk and does not consider risks beyond the simulation time horizon. In addition, it requires reinvestment, funding, and hedging assumptions for the horizon.

Economic value of equity (EVE)—The sensitivity of the value of existing assets and liabilities, including derivatives and forward commitments, to changes in interest rates. It is a long-term measurement of interest rate risk and requires assumptions that include prepayment rates on the loan portfolio and mortgage-backed securities and the repricing of deposits.

ESDA—Extended insurance sweep deposit accounts.

ETB—E*TRADE Bank.

ETFC—E*TRADE Financial Corporation.

ETS—E*TRADE Securities.

Fair value—The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value hedge—A derivative instrument designated in a hedging relationship that mitigates exposure to changes in the fair value of a recognized asset or liability or a firm commitment.

FASB—Financial Accounting Standards Board.

FCM—Futures Commission Merchant.

FDIC—Federal Deposit Insurance Corporation.

Federal Reserve—Federal Reserve System, including the Board of Governors of the Federal Reserve System and the twelve regional Federal Reserve Banks.

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FHLB—Federal Home Loan Bank.

FICO—Fair Isaac Credit Organization.

FINRA—Financial Industry Regulatory Authority.

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Generally accepted accounting principles (GAAP)—Accounting principles generally accepted in the United States of America.

HEIL—Home equity installment loan.

HELOC—Home equity line of credit.

Interest-bearing liabilities—Liabilities such as deposits, customer payables, other borrowings, corporate debt and certain customer credit balances and securities lending balances on which the Company pays interest; excludes customer cash held by third parties.

Interest-earning assets—Assets such as available-for-sale securities, held-to-maturity securities, margin receivables, loans, securities borrowed balances and segregated cash and investments that earn interest for the Company.

Interest rate swaps—Contracts that are entered into primarily as an asset/liability management strategy to reduce interest rate risk. Interest rate swap contracts are exchanges of interest rate payments, such as fixed-rate payments for floating-rate payments, based on notional amounts.

Investment grade—Defined as a rating equivalent to a Moody’s Investors Service (Moody’s) rating of “Baa3” or higher or an S&P rating of “BBB-” or higher.

LIBOR—London Interbank Offered Rate. LIBOR is the interest rate at which banks borrow funds from other banks in the London wholesale money market (or interbank market).

LLC—Limited liability company.

LTV—Loan-to-value ratio.

NASDAQ—National Association of Securities Dealers Automated Quotations.

Net interest income—A measure of interest revenue, net interest income is equal to interest income less interest expense.

Net interest margin—A measure of the net yield on our average interest-earning assets. Net interest margin is calculated for a given period by dividing the annualized sum of net interest income by average interest-earning assets.

NFA—National Futures Association.

Notional amount—The specified dollar amount underlying a derivative on which the calculated payments are based.

NYSE—The New York Stock Exchange.

OCC—Office of the Comptroller of the Currency.

Options—Contracts that grant the purchaser, for a premium payment, the right, but not the obligation, to either purchase or sell the associated financial instrument at a set price during a period or at a specified date in the future.

Probability of Default and Loss Given Default Model—Model used to determine the CECL allowance for mortgage loans that share similar risk characteristics and expected cash flows for cash-flow dependent loans. Expected credit losses are calculated by multiplying the probability that the loan will default during its remaining contractual term, adjusted for prepayments, by the expected losses given default.

~~E*TRADE~~Provision Q1for ~~2020~~credit ~~10-Q~~losses—Expense |or ~~Page~~benefit 41resulting from changes in the allowance for credit losses as a result of updated credit loss assumptions, changes in the fair value of collateral for collateral-

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dependent loans., ~~Expected~~changes ~~credit~~in ~~losses are calculated by multiplying~~ the ~~probability~~present ~~that~~value ~~the~~of ~~loan~~expected ~~will~~cash ~~default~~flows ~~during~~for ~~its~~cash-flow ~~remaining~~dependent ~~contractual term~~loans, ~~adjusted~~or ~~for~~actual ~~prepayments,~~charge-offs byor ~~the expected losses given default~~recoveries.

Provision for credit losses—Expense or benefit resulting from changes in the allowance for credit losses as a result of updated credit loss assumptions, changes in the fair value of collateral for collateral-dependent loans, changes in the present value of expected cash flows for cash-flow dependent loans, or actual charge-offs or recoveries.

RAS—Risk Appetite Statement.

Real estate owned and repossessed assets—Ownership or physical possession of real property by the Company, generally acquired as a result of foreclosure or repossession.

Recovery—Represents cash proceeds received on a loan that had been previously charged off, for example, from a sale or other settlement on the charged off loan. Recoveries may also include benefits resulting from principal paydowns or payoffs on previously charged-off loans if these exceed charge-offs for the period.

Repurchase agreement—An agreement giving the transferor of an asset the right or obligation to repurchase the same or similar securities at a specified price on a given date from the transferee. These agreements are generally collateralized by mortgage-backed or investment-grade securities. From the transferee's perspective the arrangement is referred to as a reverse repurchase agreement.

RIA—Registered Investment Advisor.

Risk-weighted assets—Primarily computed by the assignment of specific risk-weightings to assets and off-balance sheet instruments for capital adequacy calculations.

RSDA—Retirement sweep deposit account.

S&P—Standard & Poor’s.

SEC—US Securities and Exchange Commission.

Sweep deposit accounts—Accounts with the functionality to transfer customer cash balances to and from an FDIC insured account.

Tier 1 capital—Adjusted equity capital used in the calculation of capital adequacy ratios. Tier 1 capital equals: Common Equity Tier 1 capital plus qualifying preferred stock and related surplus, subject to certain other applicable adjustments.

Troubled debt restructuring (TDR)—A loan modification that involves granting an economic concession to a borrower who is experiencing financial difficulty, and loans that have been charged-off due to bankruptcy notification.

VIE—Variable interest entity.

Wholesale borrowings—Borrowings that consist of repurchase agreements and FHLB advances.

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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidated Statements of Income			4447
Condensed Consolidated Statements of Comprehensive Income			4548
Condensed Consolidated Balance Sheets			4649
Condensed Consolidated Statements of Shareholders’ Equity			4750
Condensed Consolidated Statements of Cash Flows			4851
Notes to Condensed Consolidated Financial Statements (Unaudited)			5053
Note 1—Organization, Basis of Presentation and Summary of Significant Accounting Policies			5053
Note 2—Acquisitions and Restructuring			5761
Note 3—Net Revenue			5862
Note 4—Fair Value Disclosures			6064
Note 5—Offsetting Assets and Liabilities			6771
Note 6—Available-for-Sale and Held-to-Maturity Securities			7074
Note 7—Loans Receivable and Allowance for Credit Losses			7478
Note 8—Derivative Instruments and Hedging Activities			8186
Note 9—Deposits			8389
Note 10—Other Borrowings and Corporate Debt			8489
Note 11—Shareholders' Equity			8591
Note 12—Earnings Per Share			8794
Note 13—Regulatory Requirements			8894
Note 14—Commitments, Contingencies and Other Regulatory Matters			8996

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E*TRADE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except share data and per share amounts)

(Unaudited)

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Revenue:
Interest income	$	~~443~~409	$	~~555~~560	$	852	$	1,115
Interest expense	(4321)		(6370)		(64)		(133)
Net interest income	~~400~~388		~~492~~490		788		982
Commissions	7189		~~122~~121		160		243
Fees and service charges	~~203~~205		~~118~~126		408		244
Gains on securities and other, net	20		11
Gains (losses) on securities and other, net	23		(64)		43		(53)
Other revenue	1311		12		24		24
Total non-interest income	~~307~~328		~~263~~195		635		458
Total net revenue	~~707~~716		~~755~~685		1,423		1,440
Provision (benefit) for credit losses	6(1)		(128)		5		(20)
Non-interest expense:
Compensation and benefits	~~168~~176		~~164~~168		344		332
Advertising and market development	5664		5448		120		102
Clearing and servicing	4447		3032		91		62
Professional services	2330		2226		53		48
Occupancy and equipment	3637		32		73		64
Communications	2935		1529		64		44
Depreciation and amortization	2324		21		47		42
FDIC insurance premiums	43		4		7		8
Amortization of other intangibles	15		15		30		30
Restructuring and acquisition-related activities	162		—		18		—
Other non-interest expenses	3120		1823		51		41
Total non-interest expense	~~445~~453		~~375~~398		898		773
Income before income tax expense	~~256~~264		~~392~~295		520		687
Income tax expense	7568		~~102~~76		143		178
Net income	$	~~181~~196	$	~~290~~219	$	377	$	509
Preferred stock dividends	20—		20—		20		20
Net income available to common shareholders	$	~~161~~196	$	~~270~~219	$	357	$	489
Basic earnings per common share	$	0.7389	$	10.1090	$	1.61	$	2.00
Diluted earnings per common share	$	0.7288	$	10.0990	$	1.61	$	2.00
Weighted average common shares outstanding:
Basic (in thousands)	~~222~~221,~~295~~438		~~246~~243,~~252~~007		221,866		244,620
Diluted (in thousands)	~~222~~221,~~742~~693		~~246~~243,~~934~~465		222,218		245,190

See accompanying notes to the condensed consolidated financial statements (unaudited)

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E*TRADE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net income	$	~~181~~196	$	~~290~~219	$	377	$	509
Other comprehensive (loss) income, net of tax
Other comprehensive income (loss), net of tax
Available-for-sale securities:
Unrealized (losses) gains, net	(126)		112
Unrealized gains, net	142		64		16		176
Reclassification into earnings, net	(1416)		~~(7)~~48		(30)		41
Net change from available-for-sale securities	~~(140)~~126		~~105~~112		(14)		217
Other comprehensive (loss) income	(140)		105
Other comprehensive income (loss)	126		112		(14)		217
Comprehensive income	$	41322	$	~~395~~331	$	363	$	726

See accompanying notes to the condensed consolidated financial statements (unaudited)

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E*TRADE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

	March 31,		December 31,
	June 30,		December 31,
	2020		2019
ASSETS
Cash and equivalents	$	~~1,105~~436	$	750
Cash segregated under federal or other regulations	5,730		1,879
Cash and investments segregated under federal or other regulations	5,570		1,879
Available-for-sale securities (amortized cost of $19,863 and $18,708 at March 31, 2020 and December 31, 2019, respectively)	21,440		19,501
Available-for-sale securities (amortized cost of $18,730 and $18,708 at June 30, 2020 and December 31, 2019, respectively)	19,992		19,501
Held-to-maturity securities (fair value of $25,926 and $22,246 at March 31, 2020 and December 31, 2019, respectively)	25,090		21,969
Held-to-maturity securities (fair value of $28,096 and $22,246 at June 30, 2020 and December 31, 2019, respectively)	27,182		21,969
Margin receivables	79,~~251~~422		9,675
Loans receivable, net (net of allowance for credit losses of $86 and ($17) at March 31, 2020 and December 31, 2019, respectively)	1,634		1,595
Loans receivable, net (net of allowance for credit losses of $82 and $(17) at June 30, 2020 and December 31, 2019, respectively)	1,608		1,595
Receivables from brokers, dealers and clearing organizations	1,~~124~~128		1,395
Property and equipment, net	~~339~~356		339
Goodwill	2,509		2,510
Other intangibles, net	~~419~~405		433
Other assets	1,~~215~~763		1,370
Total assets	$	6770,~~856~~371	$	61,416
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	4243,~~146~~667	$	38,606
Customer payables	15,~~960~~671		12,849
Payables to brokers, dealers and clearing organizations	~~776~~1,524		893
Corporate debt	1,~~411~~412		1,410
Other liabilities	1,~~044~~277		1,115
Total liabilities	6163,~~337~~551		54,873
Commitments and contingencies (see Note 14)
Shareholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, 403,000 shares issued and outstanding at both March 31, 2020 and December 31, 2019, respectively; aggregate liquidation preference of $700 at both March 31, 2020 and December 31, 2019, respectively	689		689
Preferred stock, $0.01 par value, 1,000,000 shares authorized, 403,000 shares issued and outstanding at both June 30, 2020 and December 31, 2019, respectively; aggregate liquidation preference of $700 at both June 30, 2020 and December 31, 2019, respectively	689		689
Common stock, $0.01 par value, 400,000,000 shares authorized, 221,032,420 and 222,622,333 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively	2		2
Common stock, $0.01 par value, 400,000,000 shares authorized, 221,092,693 and 222,622,333 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	2		2
Additional paid-in-capital	4,~~318~~328		4,416
Retained earnings	1,~~678~~843		1,464
Accumulated other comprehensive loss	(~~168~~42)		(28)
Total shareholders’ equity	6,~~519~~820		6,543
Total liabilities and shareholders’ equity	$	6770,~~856~~371	$	61,416

See accompanying notes to the condensed consolidated financial statements (unaudited)

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E*TRADE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In millions)

(Unaudited)

								AdditionalPaid-inCapital		Retained Earnings		AccumulatedOtherComprehensiveLoss		TotalShareholders’Equity
	Preferred Stock		Common Stock
	Amount		Shares	Amount
Balance at December 31, 2019	$	689	223	$	2	$	4,416	$	1,464	$	(28)	$	6,543
Cumulative effect of CECL adoption	—		—	—		—		84		—		84
Net income	—		—	—		—		181		—		181
Other comprehensive loss	—		—	—		—		—		(140)		(140)
Common stock dividends ($0.14 per share)	—		—	—		—		(31)		—		(31)
Preferred stock dividends - Series A ($29.38 per share)	—		—	—		—		(12)		—		(12)
Preferred stock dividends - Series B ($2,650.00 per share)	—		—	—		—		(8)		—		(8)
Repurchases of common stock	—		(2)	—		(95)		—		—		(95)
Share-based compensation	—		—	—		8		—		—		8
Other common stock activity	—		—	—		(11)		—		—		(11)
Balance at March 31, 2020	$	689	221	$	2	$	4,318	$	1,678	$	(168)	$	6,519
Net income	—		—	—		—		196		—		196
Other comprehensive income	—		—	—		—		—		126		126
Common stock dividends ($0.14 per share)	—		—	—		—		(31)		—		(31)
Share-based compensation	—		—	—		11		—		—		11
Other common stock activity	—		—	—		(1)		—		—		(1)
Balance at June 30, 2020	$	689	221	$	2	$	4,328	$	1,843	$	(42)	$	6,820
								AdditionalPaid-inCapital		Retained Earnings		AccumulatedOtherComprehensiveLoss		TotalShareholders’Equity
	Preferred Stock		Common Stock
	Amount		Shares	Amount
Balance at December 31, 2018	$	689	246	$	2	$	5,462	$	684	$	(275)	$	6,562
Net income	—		—	—		—		290		—		290
Other comprehensive income	—		—	—		—		—		105		105
Common stock dividends ($0.14 per share)	—		—	—		—		(35)		—		(35)
Preferred stock dividends - Series A ($29.38 per share)	—		—	—		—		(12)		—		(12)
Preferred stock dividends - Series B ($2,650.00 per share)	—		—	—		—		(8)		—		(8)
Repurchases of common stock	—		(2)	—		(120)		—		—		(120)
Share-based compensation	—		—	—		13		—		—		13
Other common stock activity	—		1	—		(13)		—		—		(13)
Balance at March 31, 2019	$	689	245	$	2	$	5,342	$	919	$	(170)	$	6,782
Net income	—		—	—		—		219		—		219
Other comprehensive income	—		—	—		—		—		112		112
Common stock dividends ($0.14 per share)	—		—	—		—		(34)		—		(34)
Repurchases of common stock	—		(5)	—		(222)		—		—		(222)
Share-based compensation	—		—	—		13		—		—		13
Balance at June 30, 2019	$	689	240	$	2	$	5,133	$	1,104	$	(58)	$	6,870

See accompanying notes to the condensed consolidated financial statements (unaudited)

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E*TRADE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Three Months Ended March 31,
	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net income	$	~~181~~377	$	~~290~~509
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (benefit) for credit losses	65		(1220)
Depreciation and amortization (including amortization and accretion on investment securities)	57130		54112
Gains on securities and other, net	(20)		(11)
(Gains) losses on securities and other, net	(43)		53
Share-based compensation	819		1326
Deferred tax expense	(1116)		93144
Other	118		(35)
Net effect of changes in assets and liabilities:
Decrease in receivables from brokers, dealers and clearing organizations	271		163
Decrease (increase) in receivables from brokers, dealers and clearing organizations	267		(142)
Decrease (increase) in margin receivables	~~2,424~~253		(~~707~~370)
Increase in other assets	(~~103~~301)		(~~183~~231)
(Decrease) increase in payables to brokers, dealers and clearing organizations	(117)		214
Increase in payables to brokers, dealers and clearing organizations	631		198
Increase in customer payables	32,~~111~~822		~~483~~512
Decrease in other liabilities	(~~997~~408)		(~~209~~560)
Net cash provided by operating activities	43,~~821~~744		~~185~~226
Cash flows from investing activities:
Purchases of available-for-sale securities	(34,~~479~~660)		(35,~~589~~028)
Proceeds from sales of available-for-sale securities	24,~~102~~109		18,~~760~~632
Proceeds from maturities of and principal payments on available-for-sale securities	~~368~~923		~~361~~788
Purchases of held-to-maturity securities	(48,~~367~~320)		(3,~~084~~753)
Proceeds from maturities of and principal payments on held-to-maturity securities	13,~~235~~075		12,~~034~~223
Decrease in loans receivable	6592		~~145~~264
Capital expenditures for property and equipment	(3477)		(3881)
Net decrease in securities purchased under agreements to resell	200		—
Net increase in securities purchased under agreements to resell	(2,400)		—
Proceeds from sale of real estate owned and repossessed assets	36		46
Net cash flow from derivative contracts	(89579)		(2989)
Other	(17)		(1830)
Net cash used in investing activities	(3,997)		(3,454)
Net cash (used in) provided by investing activities	(7,838)		2,932

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	Three Months Ended March 31,
	Six Months Ended June 30,
	2020		2019
Cash flows from financing activities:
Increase in deposits	$	3,540	$	1,015
Increase (decrease) in deposits	$	5,061	$	(5,024)
Common stock dividends	(3162)		(3569)
Preferred stock dividends	(20)		(20)
Net increase in advances from FHLB	—		300
Repurchases of common stock	(95)		(~~120~~342)
Other	(1213)		(1519)
Net cash provided by financing activities	3,382		1,125
Net cash provided by (used in) financing activities	4,871		(5,174)
Increase (decrease) in cash, cash equivalents and segregated cash	~~4,206~~777		(2,~~144~~016)
Cash, cash equivalents and segregated cash, beginning of period	2,629		3,344
Cash, cash equivalents and segregated cash, end of period	$	63,~~835~~406	$	1,~~200~~328
Cash and equivalents, end of period	$	~~1,105~~436	$	~~523~~380
Segregated cash, end of period	52,~~730~~970		~~677~~948
Cash, cash equivalents and segregated cash, end of period	$	63,~~835~~406	$	1,~~200~~328
Supplemental disclosures:
Cash paid for interest	$	4662	$	65130
(Refund received) cash paid for income taxes, net	$	(228)	$	323
Right-of-use assets recognized upon adoption of new lease standard	$	—	$	193
Right-of-use assets obtained during the period	$	46	$	1325
Cash paid for amounts included in the measurement of lease liabilities	$	919	$	713
Non-cash investing and financing activities:
Transfers from loans to other real estate owned and repossessed assets	$	45	$	410

See accompanying notes to the condensed consolidated financial statements (unaudited)

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E*TRADE FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 1—ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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:

•E*TRADE Securities is a registered broker-dealer that clears and settles customer transactions

•E*TRADE Bank is a federally chartered savings bank that provides FDIC insurance on certain qualifying amounts of customer deposits and provides other banking and cash management capabilities

•E*TRADE Financial Corporate Services is a provider of software and services for managing equity compensation plans and student loan and financial wellness benefits to our corporate clients

•E*TRADE Futures is a registered non-clearing FCM that provides retail futures transaction capabilities for our customers

•E*TRADE Capital Management is an RIA that provides investment advisory services for our customers

Basis of Presentation

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.

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E*TRADE FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Use of Estimates

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 atas ~~March~~a 31result of this analysis. The Company's analysis during the three months ended June 30, 2020 asdid anot ~~result~~identify any indicators of ~~this~~impairment ~~analysis~~for its goodwill and finite lived intangible assets despite the continued impact of COVID-19 on the global economy.

Summary of Significant Accounting Policies

Cash and Investments Segregated Under Federal or Other Regulations

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.

Adoption of the CARES Act

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.

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E*TRADE FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Adoption of New Accounting Standards

Accounting for Credit Losses

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.

~~E*TRADE~~In Q1March 2020, 10the World Health Organization declared the outbreak of COVID-Q19 |a ~~Page~~pandemic. 51The 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.

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E*TRADE FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 March 2020. The Company's allowance for credit losses on its mortgage loan portfolio as of March 31, 2020 includes the estimated financial impacts of the pandemic on its expected credit losses and resulted in an increase to the allowance for credit losses of $5 million as compared to January 1, 2020. 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 March 31, 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

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

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 ~~troubled debt restructurings (~~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.

~~E*TRADE~~The Q1Company ~~2020~~utilizes 10a 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-Qlooking |view ~~Page~~of 52macroeconomic 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.

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E*TRADE FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~The~~Loan ~~Company~~modifications ~~utilizes~~accounted afor ~~qualitative~~as ~~factor~~TDRs ~~framework~~that ~~whereby,~~are onnot acollateral-dependent ~~quarterly~~are ~~basis,~~considered ~~the~~to ~~risk~~be ~~associated~~cash-flow ~~with~~dependent as the ~~following~~Company ~~three~~expects ~~primary~~repayment ~~sets~~to ofcome ~~factors~~from ~~are~~the ~~evaluated:~~loan ~~external~~principal ~~factors,~~and ~~internal~~interest. ~~factors,~~The ~~and~~Company ~~portfolio~~uses ~~specific~~a ~~factors.~~discounted ~~The~~cash ~~uncertainty~~flow ~~related~~method to ~~these~~discount ~~factors~~expected ~~may~~cash ~~expand~~flows ~~over~~for ~~time,~~these ~~temporarily~~loans ~~impacting~~using the ~~qualitative~~loan’s ~~component~~effective ininterest ~~advance~~rate ofimmediately prior to modification. Assumptions utilized in the ~~more~~discounted ~~precise~~cash ~~identification~~flow ofmodel ~~these~~are ~~expected~~based ~~credit~~on ~~losses~~pools ~~within~~of ~~the~~loans ~~modeled~~that ~~credit~~had ~~losses.~~modifications ~~Management’~~completed under the Company's ~~estimate~~loss ofmitigation ~~expected~~program ~~credit~~in ~~losses~~which ~~includes~~an ~~qualitative~~economic ~~adjustments~~concession ~~for~~was ~~model~~granted ~~weaknesses,~~to ~~macroeconomic~~the ~~forecast~~borrower ~~uncertainty,~~experiencing ~~and~~financial ~~recoveries~~difficulties. The Company’s ~~forecast~~does ~~includes~~not aadjust ~~forward-looking~~the ~~view~~effective ofinterest ~~macroeconomic~~rate ~~factors~~for ~~over~~estimated ~~the~~prepayment ~~next~~assumptions. ~~two~~The toallowance ~~five~~for ~~years,~~credit ~~after~~losses ~~which~~reflects the ~~macroeconomic~~difference ~~factors~~between ~~revert~~the toamortized ~~externally~~cost ~~provided~~basis ~~long-term~~and ~~equilibrium~~the ~~values,~~present ~~rates,~~value orof ~~patterns~~the ~~that~~expected docash ~~not~~flows. ~~include~~Changes ~~specific~~in ~~predictions~~the ~~for~~present ~~the~~value ~~economy.~~of ~~Key~~expected ~~inputs~~cash ~~for~~flows ~~the~~are ~~forecast~~presented ~~include~~as UScredit ~~home~~loss ~~prices~~expense ~~and~~or ~~unemployment~~a ~~data.~~reversal of credit loss expense.

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, which is consistent with the policy used for estimating the impact at adoption. 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

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.

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E*TRADE FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~E*TRADE~~Securities-based ~~Line~~lending is fully collateralized by cash and securities with fair values in excess of ~~Credit~~the ~~portfolio~~amount isborrowed. ~~included~~The ~~within~~borrowers are contractually required to continually adjust the ~~Loans~~amount ~~receivable,~~of ~~net~~the ~~line~~collateral ~~item~~as ona result of changes in its fair value such that the ~~consolidated~~collateral ~~balance~~can ~~sheets~~be replenished on a daily basis. ~~Deposits~~The ~~paid~~Company ~~for~~expects ~~securities~~the ~~borrowed~~borrowers ~~are~~will ~~included~~continually ~~within~~replenish the ~~Receivables~~collateral ~~from~~and ~~brokers,~~elected ~~dealers~~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 ~~clearing~~the ~~organizations~~fully ~~line~~collateralized ~~item~~nature ~~while~~of ~~deposits~~these ~~paid~~arrangements, ~~for~~the Company has no expectation of credit losses on its securities-based ~~borrowed~~lending ~~under~~loans. ~~the~~The Company fully ~~paid~~reserves ~~lending~~for ~~program~~unsecured ~~are~~securities-based ~~included~~lending inand ~~the~~related ~~Other~~accrued ~~assets~~interest ~~line~~receivable ~~item~~when onthey ~~the~~become ~~consolidated~~90 ~~balance~~days ~~sheets~~past due.

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 of 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

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.

Debt Securities

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 ~~March~~June 3130, 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.

~~E*TRADE~~The Q1Company's ~~2020~~non-agency 10asset-Qbacked |and ~~Page~~mortgage-backed 54securities typically include senior classes of commercial mortgage-backed securities and ABS collateralized by credit card, automobile loan and

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E*TRADE FINANCIAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~securities~~student ~~was~~loan ~~$51 million~~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 ~~$67 million~~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, ~~respectively~~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 ~~included~~more ~~within~~likely than not that the ~~Other~~Company ~~assets~~will ~~line~~be required to sell the security before the recovery of the ~~consolidated~~security’s ~~balance~~amortized ~~sheets~~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 Company's non-agency asset-backed and mortgage-backed securities include senior classes of commercial mortgage-backed securities and ABS collateralized by credit card, automobile loan and 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 March 31, 2020. See Note 6—Available-for-Sale and Held-to-Maturity Securities for further details.

Receivables from Brokers, Dealers, and Other Clearing Organizations

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.

Codification Improvements Related to Credit Losses, Financial Instruments, Derivatives and Hedging

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.

Simplifying the Test for Goodwill Impairment

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.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract

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.

New Accounting Standards Not Yet Adopted

Simplifying the Accounting for Income Taxes

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.

Clarifying the Interactions Between Accounting for Investments in Equity Securities, Investments in Equity Method and Joint Ventures, and Derivatives and Hedging

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.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Facilitation of the Effects of Reference Rate Reform on Financial Reporting

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.


NOTE 2—ACQUISITIONS AND RESTRUCTURING

Proposed Merger with Morgan Stanley

On February 20, 2020, the Company entered into the Merger Agreement with Morgan Stanley under which Morgan Stanley will acquire the Company in an all-stock transaction. Under the terms of the agreement, E*TRADE common stockholders will receive 1.0432 Morgan Stanley common shares for each E*TRADE common share. The Company’s shareholders approved the merger on July 17, 2020. The acquisition is subject to customary closing conditions, including regulatory approvals, and ~~approval~~is byexpected to close in the ~~Company's~~fourth ~~shareholders~~quarter of 2020.

During the three months ended ~~March~~June 3130, 2020, the Company incurred $162 million of restructuring and acquisition-related activities expenses. These costs related primarily to legal fees in connection with the proposed merger. ~~These~~During ~~costs~~the six months ended June 30, 2020, the Company incurred $18 million of restructuring and acquisition-related ~~primarily~~activities expenses related primary to investment banking and legal fees in connection with the proposed merger. There were no restructuring and acquisition-related activities expenses during the three or six months ended ~~March~~June 3130, 2019.

Gradifi Acquisition

On December 9, 2019, the Company completed its acquisition of Gradifi, a student loan and financial wellness provider, for a purchase price of $30 million. The Company recorded goodwill of $25 million, which includes synergies expected to result from combining operations with Gradifi to enhance the Company's existing product offerings. The Company also recorded technology intangible assets of $3 million, which are subject to amortization over an estimated useful life of 6six years. During the three months ended March 31, 2020, the Company recorded purchase accounting adjustments which resulted in a net increase in technology intangible assets of $1 million and a corresponding decrease of $1 million to the recorded goodwill.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 3—NET REVENUE

The following table presents the significant components of total net revenue (dollars in millions):

					Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net interest income	$	388	$	490	$	~~400~~788	$	~~492~~982
Commissions	89		121		71160		~~122~~243
Fees and service charges	205		126		~~203~~408		~~118~~244
Gains on securities and other, net					20		11
Gains (losses) on securities and other, net	23		(64)		43		(53)
Other revenue	11		12		1324		1224
Total net revenue (1)	$	716	$	685	$	~~707~~1,423	$	~~755~~1,440

(1)Contract balances and transaction price allocated to remaining performance obligations were not material for the periods presented.

Effective October 7, 2019, the Company eliminated retail commissions for online US listed stock, ETF, and options trades. WeThe Company also reduced the options contract charge to $0.65 per contract for all traders while maintaining our active trader pricing at $0.50 per contract.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Interest Income and Interest Expense

The following table presents the significant components of interest income and interest expense (dollars in millions):

					Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Interest income:
Cash and equivalents	$	—	$	3	$	2	$	36
Cash segregated under federal or other regulations					8		6
Cash and investments segregated under federal or other regulations	3		6		11		12
Investment securities	272		368		~~285~~557		~~365~~733
Margin receivables	68		130		94162		~~126~~256
Loans	16		28		2137		2856
Broker-related receivables and other	—		3		4		47
Subtotal interest income	359		538		~~414~~773		~~532~~1,070
Other interest revenue(1)	50		22		2979		2345
Total interest income	409		560		~~443~~852		~~555~~1,115
Interest expense:
Sweep deposits:
Brokerage sweep deposits	2		18		57		2038
Bank sweep deposits(2)	—		—		13		—
Savings deposits	—		23		3		1538
Customer payables	1		8		45		917
Broker-related payables and other	—		1		—		12
Other borrowings	1		4		12		26
Corporate debt	13		14		1427		1428
Subtotal interest expense	17		68		4057		61129
Other interest expense(3)	4		2		37		24
Total interest expense	21		70		4364		63133
Net interest income	$	388	$	490	$	~~400~~788	$	~~492~~982

(1)Other interest revenue is earned on certain securities loaned balances. Interest expense incurred on other securities loaned balances is presented on the broker-related payables and other line item above.

(2)Beginning in Q4 2019, bank sweep deposits include Premium Savings Accounts participating in the newly established bank sweep deposit account program. Refer to Note 9—Deposits for additional information.

(3)Other interest expense is incurred on certain securities borrowed balances. Interest income earned on other securities borrowed balances is presented on the broker-related receivables and other line item above.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fees and Service Charges

The following table presents the significant components of fees and service charges (dollars in millions):

					Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Fees and service charges:
Order flow revenue	$	120	$	45	$	85205	$	4388
Money market funds and sweep deposits revenue	22		23		6082		2144
Advisor management and custody fees	19		19		1938		1837
Mutual fund service fees	10		13		1323		1225
Foreign exchange revenue	9		8		918		816
Reorganization fees	12		7		416		613
Other fees and service charges	13		11		1326		1021
Total fees and service charges	$	205	$	126	$	~~203~~408	$	~~118~~244


NOTE 4—FAIR VALUE DISCLOSURES

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company may use various valuation approaches, including market, income and/or cost approaches. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from the perspective of a market participant. Accordingly, even when market assumptions are not readily available, the Company’s own assumptions reflect those that market participants would use in pricing the asset or liability at the measurement date. The fair value measurement accounting guidance describes the following three levels used to classify fair value measurements:

•Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company

•Level 2 - quoted prices for similar assets and liabilities in an active market, quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly

•Level 3 - unobservable inputs that are significant to the fair value of the assets or liabilities

The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to a fair value measurement requires judgment and consideration of factors specific to the asset or liability.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Recurring Fair Value Measurement Techniques

Agency Debt and Mortgage-backed Securities

The Company’s agency mortgage-backed securities portfolio is comprised of debt securities which are guaranteed by US government sponsored enterprises and federal agencies. The fair value of agency mortgage-backed securities was determined using a market approach with quoted market prices, recent transactions and spread data for identical or similar instruments. Agency mortgage-backed securities were categorized in Level 2 of the fair value hierarchy.

The fair value measurements of agency debentures and other agency debt securities were determined using market and income approaches along with the Company’s own trading activities for identical or similar instruments and were categorized in Level 2 of the fair value hierarchy.

US Treasuries

The Company's fair value level classification of US Treasuries is based on the original maturity dates of the securities and whether the securities are the most recent issuances of a given maturity. US Treasuries with original maturities ~~less~~of ~~than~~ one year or less are classified as Level 1. US Treasuries with original maturities greater than one year are classified as Level 1 if they represent the most recent issuance of a given maturity; otherwise, these securities are classified as Level 2.

Non-agency Debt Securities

The Company's non-agency debt securities include senior classes of commercial mortgage-backed securities and ABS collateralized by credit card, automobile loan and student loan receivables. The fair value of non-agency debt securities was determined using a market approach with recent transactions and spread data for identical or similar instruments. Non-agency debt securities were categorized in Level 2 of the fair value hierarchy.

Nonrecurring Fair Value Measurement Techniques

Certain other assets are recorded at fair value on a nonrecurring basis: 1) one- to four-family and home equity loans in which the amount of the loan balance in excess of the estimated current value of the underlying property less estimated selling costs has been charged-off; and 2) real estate owned that is carried at the lower of the property’s carrying value or fair value less estimated selling costs.

Loans Receivable

Loans that have been delinquent for 180 days or that are in bankruptcy and certain TDR loan modifications are charged-off based on the estimated current value of the underlying property less estimated selling costs. Property valuations for these one- to four-family and home equity loans are based on the most recent "as is" property valuation data available, which may include appraisals, broker price opinions, automated valuation models or updated values using home price indices.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Real Estate Owned

Property valuations for real estate owned are based on the lowest value of the most recent property valuation data available, which may include appraisals, listing prices or approved offer prices. Nonrecurring fair value measurements on one- to four-family loans, home equity loans and real estate owned were classified as Level 3 of the fair value hierarchy as the valuations included unobservable inputs that were significant to the fair value. The following table presents additional information about significant unobservable inputs used in the valuation of assets measured at fair value on a nonrecurring basis that were categorized in Level 3 of the fair value hierarchy:

Unobservable Inputs

Average

Range

March 31, 2020:

June 30, 2020:

Loans receivable:

One- to four-family

Appraised value

~~402~~510,~~200~~600

$6955,000 - $~~796~~1,115,000

Home equity

Appraised value

~~295~~345,~~900~~200

$7030,000 - $~~756~~1,425,000

Real estate owned

Appraised value

~~407~~443,~~000~~500

$100,000 - $~~979~~1,000,000

December 31, 2019:

Loans receivable:

One- to four-family

Appraised value

815,900

$92,000 - $2,700,000

Home equity

Appraised value

437,300

$75,000 - $1,440,000

Real estate owned

Appraised value

391,700

$80,000 - $897,000

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Recurring and Nonrecurring Fair Value Measurements

The following tables present the significant components of assets and liabilities measured at fair value (dollars in millions):

	Level 1		Level 2		Level 3		TotalFair Value
March 31, 2020:
June 30, 2020:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Agency mortgage-backed securities	$	—	$	1715,~~449~~635	$	—	$	1715,~~449~~635
Agency debentures	—		~~965~~1,255		—		~~965~~1,255
US Treasuries	—175		1,~~343~~148		—		1,~~343~~323
Non-agency asset-backed securities	—		1,~~411~~488		—		1,~~411~~488
Non-agency mortgage-backed securities	—		~~272~~291		—		~~272~~291
Total available-for-sale securities	—175		2119,~~440~~817		—		2119,~~440~~992
Total assets measured at fair value on a recurring basis(1)	$	—175	$	2119,~~440~~817	$	—	$	2119,~~440~~992
Nonrecurring fair value measurements:
Loans receivable, net:
One- to four-family	$	—	$	—	$	36	$	36
Home equity	—		—		23		23
Total loans receivable	—		—		59		59
Other assets:
Real estate owned	—		—		8		8
Total assets measured at fair value on a nonrecurring basis(2)	$	—	$	—	$	1317	$	1317

(1)Assets measured at fair value on a recurring basis represented 3228% of the Company’s total assets at ~~March~~June 3130, 2020.

(2)Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheets at ~~March~~June 3130, 2020, and for which a fair value measurement was recorded during the period.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Level 1		Level 2		Level 3		Total Fair Value
December 31, 2019:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Agency mortgage-backed securities	$	—	$	17,035	$	—	$	17,035
Agency debentures	—		659		—		659
US Treasuries	—		1,227		—		1,227
Non-agency asset-backed securities	—		417		—		417
Non-agency mortgage-backed securities	—		163		—		163
Total available-for-sale securities	—		19,501		—		19,501
Total assets measured at fair value on a recurring basis⁽¹⁾	$	—	$	19,501	$	—	$	19,501
Nonrecurring fair value measurements:
Loans receivable, net:
One- to four-family	$	—	$	—	$	14	$	14
Home equity	—		—		4		4
Total loans receivable	—		—		18		18
Other assets:
Real estate owned	—		—		12		12
Total assets measured at fair value on a nonrecurring basis⁽²⁾	$	—	$	—	$	30	$	30

(1)Assets measured at fair value on a recurring basis represented 32% of the Company’s total assets at December 31, 2019.

(2)Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheets at December 31, 2019, and for which a fair value measurement was recorded during the period.

Gains and losses on assets measured at fair value on a nonrecurring basis were not material for the periods presented.

Recurring Fair Value Measurements Categorized within Level 3

For the periods presented, no assets or liabilities measured at fair value on a recurring basis were categorized within Level 3 of the fair value hierarchy. The Company had no transfers between levels during the periods presented.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fair Value of Financial Instruments Not Carried at Fair Value

The following tables present the carrying values, fair values and fair value hierarchy level classification of financial instruments that are not carried at fair value on the consolidated balance sheets (dollars in millions):

	March 31, 2020
	June 30, 2020
	CarryingValue		Level 1		Level 2		Level 3		TotalFair Value
Assets
Cash and equivalents	$	~~1,105~~436	$	~~1,105~~436	$	—	$	—	$	~~1,105~~436
Cash segregated under federal or other regulations	$	5,730	$	5,730	$	—	$	—	$	5,730
Cash and investments segregated under federal or other regulations(1)	$	5,570	$	2,970	$	2,600	$	—	$	5,570
Held-to-maturity securities:
Agency mortgage-backed securities	$	2325,~~531~~579	$	—	$	2426,~~297~~415	$	—	$	2426,~~297~~415
Agency debentures	~~108~~208		—		~~121~~219		—		~~121~~219
Other agency debt securities	1,~~451~~395		—		1,~~508~~462		—		1,~~508~~462
Total held-to-maturity securities	$	2527,~~090~~182	$	—	$	2528,~~926~~096	$	—	$	2528,~~926~~096
Margin receivables(1)	$	7,251	$	—	$	7,251	$	—	$	7,251
Margin receivables(2)	$	9,422	$	—	$	9,422	$	—	$	9,422
Loans receivable, net:
One- to four-family	$	~~794~~754	$	—	$	—	$	~~751~~759	$	~~751~~759
Home equity	~~645~~596		—		—		~~599~~596		~~599~~596
Securities-based lending	~~195~~258		—		~~195~~258		—		~~195~~258
Total loans receivable, net(2)	$	1,634	$	—	$	195	$	1,350	$	1,545
Total loans receivable, net(3)	$	1,608	$	—	$	258	$	1,355	$	1,613
Receivables from brokers, dealers and clearing organizations(1)	$	1,124	$	—	$	1,124	$	—	$	1,124
Receivables from brokers, dealers and clearing organizations(2)	$	1,128	$	—	$	1,128	$	—	$	1,128
Other assets(1)(3)	$	97	$	—	$	97	$	—	$	97
Other assets(2)(4)	$	204	$	—	$	204	$	—	$	204
Liabilities
Deposits	$	4243,~~146~~667	$	—	$	4243,~~146~~667	$	—	$	4243,~~146~~667
Customer payables	$	15,~~960~~671	$	—	$	15,~~960~~671	$	—	$	15,~~960~~671
Payables to brokers, dealers and clearing organizations	$	~~776~~1,524	$	—	$	~~776~~1,524	$	—	$	~~776~~1,524
Corporate debt	$	1,~~411~~412	$	—	$	1,~~400~~546	$	—	$	1,~~400~~546

(1)~~The~~Includes ~~fair~~$2.6 billion ~~value~~ of securities ~~that~~purchased ~~the~~under ~~Company~~agreements ~~received~~to asresell. ~~collateral~~The infair ~~connection~~value ~~with~~of ~~margin~~the ~~receivables and~~ securities ~~borrowing~~that ~~activities, including~~ the ~~fully~~Company ~~paid~~received ~~lending~~as ~~program,~~collateral ~~where~~for ~~the~~securities ~~Company~~purchased isunder ~~permitted~~agreements to ~~sell~~resell ~~or re-pledge the securities,~~ was $102.1 6 billion at ~~March~~June 3130, 2020. ~~Of this amount, $3.0 billion had been pledged or sold in connection with securities loaned and deposits with clearing organizations at March 31, 2020.~~

(2)The ~~carrying~~fair value of ~~loans~~securities ~~receivable~~that the Company received as collateral in connection with margin receivables and securities borrowing activities, ~~net~~including ~~includes~~the fully paid lending program, where the ~~net~~Company ~~"negative~~is ~~allowance"~~permitted ~~for~~to ~~credit~~sell ~~losses~~or ofre-pledge the securities, was $8612.8 ~~million~~billion ~~and~~at ~~loans~~June ~~that~~30, ~~are~~2020. ~~recorded~~Of atthis ~~fair~~amount, ~~value~~$3.2 onbillion ahad ~~nonrecurring~~been ~~basis~~pledged or sold in connection with securities loaned and deposits with clearing organizations at ~~March~~June 3130, 2020.

(3)~~Represents~~The ~~securities~~carrying ~~borrowing~~value ~~from~~of ~~customers~~loans ~~under~~receivable, net includes the ~~fully~~net ~~paid~~"negative ~~lending~~allowance" ~~program~~for credit losses of $82 million and loans that are recorded at fair value on a nonrecurring basis at June 30, 2020.

~~E*TRADE~~(4)Represents Q1securities ~~2020~~borrowing ~~10-Q~~from |customers ~~Page~~under 65the fully paid lending program.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	December 31, 2019
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Assets
Cash and equivalents	$	750	$	750	$	—	$	—	$	750
Cash segregated under federal or other regulations	$	1,879	$	1,879	$	—	$	—	$	1,879
Held-to-maturity securities:
Agency mortgage-backed securities	$	20,085	$	—	$	20,329	$	—	$	20,329
Agency debentures	267		—		271		—		271
Other agency debt securities	1,617		—		1,646		—		1,646
Total held-to-maturity securities	$	21,969	$	—	$	22,246	$	—	$	22,246
Margin receivables⁽¹⁾	$	9,675	$	—	$	9,675	$	—

Filing Compare · E TRADE FINANCIAL CORP