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EX-32.1 - EX-32.1 - E TRADE FINANCIAL CORPetfc-20150630xex321.htm
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EX-31.2 - EX-31.2 - E TRADE FINANCIAL CORPetfc-20150630xex312.htm
EX-10.3 - EX-10.3 - E TRADE FINANCIAL CORPetradeclearing364-dayrevol.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
_____________________________
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
¨    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
 ____________________________
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)
1271 Avenue of the Americas, 14th Floor, New York, New York 10020
(Address of principal executive offices and Zip Code)

(646) 521-4300
(Registrant’s telephone number, including area code)
 ____________________________
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   x
Accelerated filer
 
¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
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 July 31, 2015, there were 290,306,550 shares of common stock outstanding.



E*TRADE FINANCIAL CORPORATION
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended June 30, 2015
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
Unless otherwise indicated, references to "the Company," "we," "us," "our" and "E*TRADE" mean E*TRADE Financial Corporation and its subsidiaries.

i


E*TRADE, E*TRADE Financial, E*TRADE Bank, Equity Edge, OptionsLink and the Converging Arrows logo are registered trademarks of E*TRADE Financial Corporation in the United States and in other countries.

ii


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 relate to our future plans, objectives, expectations and intentions based on certain assumptions and include any 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, those discussed under Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q; and Part I. Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC, which are incorporated herein by reference. 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. The forward-looking statements contained in this report reflect our expectations only as of the date of this report. You should not place undue reliance on forward-looking statements, as we do not undertake to update or revise forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made, except as required by law.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2014.
GLOSSARY OF TERMS
In analyzing and discussing our business, we utilize certain metrics, ratios and other terms that are defined in the Glossary of Terms, which is located at the end of this item.
OVERVIEW
Strategy
Our business strategy is centered on two core objectives: accelerating the growth of our core brokerage business to improve market share, and strengthening our overall financial and franchise position.
Accelerate Growth of Core Brokerage Business
Capitalize on secular growth within the direct brokerage industry.
The direct brokerage industry is growing at a faster rate than the traditional brokerage industry. We are focused on capitalizing on this growth through ensuring our customers' trading and investing needs are met through our direct relationships.
Enhance digital and offline customer experience.
We are focused on maintaining our competitive position in trading, margin lending and cash management, while expanding our customer share of wallet in retirement, investing and savings. Through these offerings, we aim to continue acquiring new customers while also deepening the engagement of both new and existing customers.
Capitalize on value of corporate services business.
Our corporate services business is a strategically important driver of brokerage account growth for us. We are leveraging our industry-leading position to improve client acquisition, and are bolstering awareness among plan participants of our full suite of offerings.
Maximize value of customer deposits while improving balance sheet efficiency.
Our brokerage business generates a significant amount of stable, low-cost deposits, which we monetize through E*TRADE Bank by investing primarily in low-risk, agency mortgage-backed securities.

1


Strengthen Overall Financial and Franchise Position
Manage down legacy investments and mitigate credit losses.
We continue to manage down the size and risks associated with our legacy loan portfolio, while mitigating credit losses where possible.
Continue to execute on our capital plan.
Our capital plan was laid out in 2012 with a key goal of distributing capital from E*TRADE Bank to the parent company, with the key objective of reducing corporate debt. We are now focused on utilizing excess capital created through earnings and achieving lower capital requirements at E*TRADE Bank, while continuing to demonstrate sustainability of our enterprise risk management culture and capabilities.
Key Factors Affecting Financial Performance
Our financial performance is affected by a number of factors outside of our control, including:
customer demand for financial products and services;
weakness or strength of the residential real estate and credit markets;
performance, volume and volatility of the equity and capital markets;
customer perception of the financial strength of our franchise;
market demand and liquidity in the secondary market for mortgage loans and securities;
market demand and liquidity in the wholesale borrowings market, including securities sold under agreements to repurchase;
the level and volatility of interest rates;
our ability to move capital to our parent company from our subsidiaries subject to various regulatory approvals; and
changes to the rules and regulations governing the financial services industry.
In addition to the items noted above, our success in the future will depend upon, among other things, our ability to:
have continued success in the acquisition, growth and retention of brokerage customers;
generate meaningful growth in our retirement, investing and savings customer products;
continue to demonstrate the sustainability of our enterprise risk management culture and capabilities;
mitigate credit costs;
manage to a lower Tier 1 leverage ratio at E*TRADE Bank, as stated in our capital plan;
generate capital sufficient to meet our operating needs at both E*TRADE Bank and our parent company;
evaluate and utilize excess capital to maximize shareholder value;
assess and manage interest rate risk;
maintain disciplined expense control and improved operational efficiency; and
compete in a technology-intensive industry characterized by rapid innovation.

2


Management monitors a number of metrics in evaluating the Company’s performance. The most significant of these are shown in the table and discussed in the text below: 
 
Three Months Ended June 30,
Variance
 
Six Months Ended June 30,
Variance
 
2015
 
2014
 
2015 vs. 2014
 
2015
 
2014
 
2015 vs. 2014
Customer Activity Metrics:
 
 
 
 
 
 
 
 
 
 
 
Daily average revenue trades ("DARTs")
149,448

 
155,194

 
(4
)%
 
159,534

 
176,224

 
(9
)%
Average commission per trade
$
10.96

 
$
10.72

 
2
 %
 
$
10.95

 
$
10.68

 
3
 %
Margin receivables (dollars in billions)
$
8.1

 
$
7.3

 
11
 %
 
$
8.1

 
$
7.3

 
11
 %
End of period brokerage accounts(1)
3,201,326

 
3,102,966

 
3
 %
 
3,201,326

 
3,102,966

 
3
 %
Net new brokerage accounts(1)
18,687

 
33,005

 
(43
)%
 
57,403

 
104,907

 
(45
)%
Annualized brokerage account attrition rate(1)
9.6
%
 
8.6
%
 
*
 
9.2
%
 
8.0
%
 
*
Customer assets (dollars in billions)
$
302.4

 
$
280.9

 
8
 %
 
$
302.4

 
$
280.9

 
8
 %
Net new brokerage assets (dollars in billions)
$
0.9

 
$
1.0

 
(10
)%
 
$
4.4

 
$
5.1

 
(14
)%
Brokerage related cash (dollars in billions)
$
42.0

 
$
40.0

 
5
 %
 
$
42.0

 
$
40.0

 
5
 %
Company Financial Metrics:
 
 
 
 
 
 
 
 
 
 
 
Corporate cash (dollars in millions)
$
406

 
$
570

 
(29
)%
 
$
406

 
$
570

 
(29
)%
E*TRADE Financial Tier 1 leverage ratio(2)
8.5
%
 
7.5
%
 
1.0
 %
 
8.5
%
 
7.5
%
 
1.0
 %
E*TRADE Bank Tier 1 leverage ratio(2)(3)
9.8
%
 
10.2
%
 
(0.4
)%
 
9.8
%
 
10.2
%
 
(0.4
)%
Special mention loan delinquencies (dollars in millions)
$
143

 
$
155

 
(8
)%
 
$
143

 
$
155

 
(8
)%
Allowance for loan losses (dollars in millions)
$
402

 
$
401

 
 %
 
$
402

 
$
401

 
 %
Enterprise net interest spread
2.50
%
 
2.55
%
 
(0.05
)%
 
2.56
%
 
2.51
%
 
0.05
 %
Enterprise interest-earning assets (average dollars in billions)
$
42.3

 
$
41.4

 
2
 %
 
$
41.7

 
$
41.8

 
*
*
Percentage not meaningful. 
(1)
End of period brokerage accounts, net new brokerage accounts and annualized brokerage account attrition rate include the closure of 3,484 accounts related to the escheatment of unclaimed property and 3,325 accounts related to the shutdown of the Company’s global trading platform.
(2)
Beginning in the first quarter of 2015, E*TRADE Financial and E*TRADE Bank calculate regulatory capital under the Basel III framework using the Standardized Approach, subject to transition provisions. Prior to the first quarter of 2015, the risk-based capital guidelines that applied to E*TRADE Bank were based upon the 1988 capital accords of the Basel Committee on Banking Supervision ("BCBS"), a committee of central banks and bank supervisors, as implemented by the U.S. Federal banking agencies, including the OCC, commonly known as Basel I. As a savings and loan holding company, E*TRADE Financial was not previously subject to specific statutory capital requirements. Therefore, E*TRADE Financial's Tier 1 leverage ratio as of June 30, 2014 was a non-GAAP measure and was calculated based on the Federal Reserve’s well-capitalized requirements then applicable to bank holding companies. See Liquidity and Capital Resources in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
(3)
E*TRADE Clearing LLC ("E*TRADE Clearing") was moved out from under E*TRADE Bank in July 2015. Excluding E*TRADE Clearing as of June 30, 2015, E*TRADE Bank's Tier 1 leverage ratio was 9.3%.
Customer Activity Metrics
DARTs are the predominant driver of commissions revenue from our customers.
Average commission per trade is an indicator of changes in our customer mix, product mix and/or product pricing.

3


Margin receivables represent credit extended to customers to finance their purchases of securities by borrowing against securities they own and are a key driver of net operating interest income.
End of period brokerage accounts, net new brokerage accounts and brokerage account attrition rate are indicators of our ability to attract and retain brokerage customers. The brokerage account attrition rate is calculated by dividing attriting brokerage accounts, which are gross new brokerage accounts less net new brokerage accounts, by total brokerage accounts at the previous period end. This rate is presented on an annualized basis.
Changes in customer assets are an indicator of the value of our relationship with the customer. An increase in customer assets generally indicates that the use of our products and services by existing and new customers is expanding. Changes in this metric are also driven by changes in the valuations of our customers’ underlying securities.
Net new brokerage assets are total inflows to all new and existing brokerage accounts less total outflows from all closed and existing brokerage accounts and are a general indicator of the use of our products and services by new and existing brokerage customers.
Brokerage related cash is an indicator of the level of engagement with our brokerage customers and is a key driver of net operating interest income as well as fees earned on customer assets held by third parties outside the Company.
Company Financial Metrics
Corporate cash is an indicator of the liquidity at the parent company. It is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. See Liquidity and Capital Resources in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of this non-GAAP measure to the comparable GAAP measure.
Tier 1 leverage ratio is an indication of capital adequacy for E*TRADE Financial and E*TRADE Bank. Tier 1 leverage ratio is Tier 1 capital divided by adjusted average total assets for leverage capital purposes. Beginning in the first quarter of 2015, E*TRADE Financial and E*TRADE Bank calculate regulatory capital under the Basel III framework using the Standardized Approach, subject to transition provisions. Prior to Basel III becoming effective, E*TRADE Financial capital ratios were non-GAAP measures as the parent company was not yet held to regulatory capital requirements. See Liquidity and Capital Resources in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information, including the calculation of regulatory capital ratios and a reconciliation of previously non-GAAP capital ratios to the comparable GAAP measures.
Special mention loan delinquencies are loans 30-89 days past due and are an indicator of the expected trend for charge-offs in future periods as these loans have a greater propensity to migrate into nonaccrual status and ultimately be charged-off.
Allowance for loan losses is an estimate of probable losses inherent in the loan portfolio as of the balance sheet date, as well as the forecasted losses, including economic concessions to borrowers, over the estimated remaining life of loans modified as troubled debt restructurings ("TDR").
Enterprise interest-earning assets, in conjunction with our enterprise net interest spread, are indicators of our ability to generate net operating interest income.
Significant Events in the Second Quarter of 2015
Generated a $220 Million Income Tax Benefit from Settlement of Internal Revenue Service ("IRS") Examination
In May 2015, we settled the IRS examination of our 2007, 2009 and 2010 federal tax returns. The settlement resulted in the recognition of a $220 million income tax benefit in the second quarter of 2015. The settlement also resulted in an increase in our deferred tax assets.
Completed Second Official Stress Test under Dodd-Frank
We completed our second annual stress test under Dodd-Frank in which E*TRADE Bank performed well under all stress scenarios, remaining above regulatory well-capitalized minimums by a healthy margin.

4


E*TRADE Bank and E*TRADE Securities LLC ("E*TRADE Securities") Issued $143 Million in Dividends to the Parent Company
We received approval from our regulators for a $92 million dividend from E*TRADE Bank to the parent company, totaling $642 million in quarterly dividends since the third quarter of 2013 and continuing to reflect significant progress in our capital plan.
An additional $51 million dividend was issued from E*TRADE Securities to the parent company, totaling $485 million in dividends to the parent company after E*TRADE Securities was moved out from under E*TRADE Bank in February 2015.
E*TRADE Clearing Established a $345 Million Credit Facility and Was Moved out from under E*TRADE Bank
E*TRADE Clearing entered into a new $345 million senior unsecured revolving credit facility as an additional source of liquidity for its operations in June 2015, bringing its total external funding available to approximately $900 million. E*TRADE Clearing was moved out from under E*TRADE Bank in July 2015.
Enhancements to Our Trading and Investing Products and Services
We launched the new Apple Watch app that delivers market data in an engaging and simple format and assists investors and traders in monitoring their portfolios, watchlists and the markets.
On our active trader platform, E*TRADE Pro, we rolled out a robust new tutorial experience, new plug and play layouts to support the unique needs of traders, as well as improvements to several other customization features. We also simplified watch-list management and charting options, and added the ability to trade tax lots across equity and options positions.
We revamped the retirement experience on etrade.com, creating a cleaner, simpler design, with inviting content that helps customers engage and take charge, including interactive widgets customized to each account, an account wizard that helps direct customers to the retirement account that is right for them and personalized check-lists and to-do lists for each stage of an investor’s retirement planning.
EARNINGS OVERVIEW
We generated net income of $292 million and $332 million, or $0.99 and $1.13 per diluted share, on total net revenue of $445 million and $901 million for the three and six months ended June 30, 2015, respectively. Net operating interest income remained unchanged at $267 million and increased 2% to $538 million for the three and six months ended June 30, 2015 respectively, compared to the same periods in 2014. Commissions, fees and service charges and other revenue increased 2% to $167 million and decreased 2% to $343 million for the three and six months ended June 30, 2015 respectively, compared to the same periods in 2014. Provision for loan losses decreased 75% to $3 million and 50% to $8 million for the three and six months ended June 30, 2015 respectively, compared to the same periods in 2014. Total operating expenses increased 9% to $309 million and 6% to $609 million for the three and six months ended June 30, 2015 respectively, compared to the same periods in 2014.
The following sections describe in detail the changes in key operating factors and other changes and events that affected net revenue, provision for loan losses, operating expense, other income (expense) and income tax expense (benefit).

5


Revenue
The components of revenue and the resulting variances are as follows (dollars in millions):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Net operating interest income
$
267

 
$
267

 
$

 
*
 
$
538

 
$
530

 
$
8

 
2
 %
Commissions
103

 
105

 
(2
)
 
(2
)%
 
217

 
233

 
(16
)
 
(7
)%
Fees and service charges
55

 
49

 
6

 
12
 %
 
107

 
99

 
8

 
8
 %
Principal transactions

 

 

 
*
 

 
10

 
(10
)
 
*
Gains on loans and securities, net
11

 
7

 
4

 
57
 %
 
20

 
22

 
(2
)
 
(9
)%
Other revenues
9

 
10

 
(1
)
 
(10
)%
 
19

 
19

 

 
*
Total non-interest income
178

 
171

 
7

 
4
 %
 
363

 
383

 
(20
)
 
(5
)%
Total net revenue
$
445

 
$
438

 
$
7

 
2
 %
 
$
901

 
$
913

 
$
(12
)
 
(1
)%
 
*
Percentage not meaningful.
Net Operating Interest Income
Net operating interest income remained unchanged at $267 million and increased 2% to $538 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. Net operating interest income is earned primarily through investing deposits and customer payables in assets including: available-for-sale securities, held-to-maturity securities, margin receivables and real estate loans.
The following table presents enterprise average balance sheet data and enterprise income and expense data for our operations, as well as the related net interest spread, yields and rates prepared on the basis required by the SEC’s Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" (dollars in millions): 
 

6


 
Three Months Ended June 30,
 
2015
 
2014
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/Cost
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/Cost
Enterprise interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans(1)
$
5,864

 
$
57

 
3.89
%
 
$
7,416

 
$
77

 
4.18
%
Available-for-sale securities
13,587

 
66

 
1.93
%
 
12,742

 
72

 
2.28
%
Held-to-maturity securities
12,366

 
86

 
2.78
%
 
11,298

 
82

 
2.91
%
Margin receivables
8,118

 
70

 
3.44
%
 
7,330

 
65

 
3.56
%
Cash and equivalents
1,409

 

 
0.20
%
 
1,310

 
1

 
0.15
%
Segregated cash
379

 

 
0.15
%
 
799

 
1

 
0.10
%
Securities borrowed and other
608

 
31

 
20.41
%
 
500

 
21

 
16.43
%
Total enterprise interest-earning assets
42,331

 
310

 
2.93
%
 
41,395

 
319

 
3.08
%
Non-operating interest-earning and non-interest earning assets(2)
4,818

 
 
 
 
 
4,203

 
 
 
 
Total assets
$
47,149

 
 
 
 
 
$
45,598

 
 
 
 
Enterprise interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
26,285

 
1

 
0.01
%
 
$
25,239

 
2

 
0.03
%
Customer payables
6,576

 
1

 
0.08
%
 
6,250

 
3

 
0.16
%
Securities sold under agreements to repurchase
3,642

 
25

 
2.77
%
 
4,010

 
30

 
2.98
%
FHLB advances and other borrowings
1,306

 
16

 
4.65
%
 
1,285

 
17

 
5.24
%
Securities loaned and other
1,828

 

 
0.10
%
 
1,506

 

 
0.03
%
Total enterprise interest-bearing liabilities
39,637

 
43

 
0.43
%
 
38,290

 
52

 
0.53
%
Non-operating interest-bearing and non-interest bearing liabilities(3)
1,918

 
 
 
 
 
2,187

 
 
 
 
Total liabilities
41,555

 
 
 
 
 
40,477

 
 
 
 
Total shareholders’ equity
5,594

 
 
 
 
 
5,121

 
 
 
 
Total liabilities and shareholders’ equity
$
47,149

 
 
 
 
 
$
45,598

 
 
 
 
Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread(4)
$
2,694

 
$
267

 
2.50
%
 
$
3,105

 
$
267

 
2.55
%
 
 
 
 
 
 
 
 
 
 
 
 
Enterprise net interest margin (net yield on enterprise interest-earning assets)
 
 
 
2.52
%
 
 
 
 
 
2.58
%
Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities
 
 
 
106.80
%
 
 
 
 
 
108.11
%
Return on average:(5)
 
 
 
 
 
 
 
 
 
 
 
     Total assets
 
 
 
 
2.48
%
 
 
 
 
 
0.61
%
     Total shareholders' equity
 
 
 
 
20.91
%
 
 
 
 
 
5.40
%
Average equity to average total assets
 
 
 
 
11.86
%
 
 
 
 
 
11.23
%


7


 
Six Months Ended June 30,
 
2015
 
2014
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/Cost
 
Average Balance
 
Operating Interest Inc./Exp.
 
Average Yield/Cost
Enterprise interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans(1)
$
6,033

 
$
119

 
3.95
%
 
$
7,904

 
$
161

 
4.08
%
Available-for-sale securities
12,967

 
132

 
2.03
%
 
13,115

 
151

 
2.30
%
Held-to-maturity securities
12,322

 
174

 
2.82
%
 
10,927

 
159

 
2.91
%
Margin receivables
8,004

 
138

 
3.47
%
 
7,134

 
127

 
3.60
%
Cash and equivalents
1,409

 
1

 
0.19
%
 
1,229

 
1

 
0.15
%
Segregated cash
344

 

 
0.12
%
 
818

 
1

 
0.10
%
Securities borrowed and other
633

 
62

 
19.75
%
 
626

 
38

 
12.24
%
Total enterprise interest-earning assets
41,712

 
626

 
3.01
%
 
41,753

 
638

 
3.06
%
Non-operating interest-earning and non-interest earning assets(2)
4,908

 
 
 
 
 
4,235

 
 
 
 
Total assets
$
46,620

 
 
 
 
 
$
45,988

 


 
 
Enterprise interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
25,671

 
3

 
0.02
%
 
$
25,465

 
4

 
0.03
%
Customer payables
6,483

 
2

 
0.08
%
 
6,310

 
5

 
0.16
%
Securities sold under agreements to repurchase
3,685

 
51

 
2.77
%
 
4,232

 
65

 
3.06
%
FHLB advances and other borrowings
1,303

 
31

 
4.65
%
 
1,283

 
34

 
5.26
%
Securities loaned and other
1,794

 
1

 
0.12
%
 
1,367

 

 
0.04
%
Total enterprise interest-bearing liabilities
38,936

 
88

 
0.45
%
 
38,657

 
108

 
0.55
%
Non-operating interest-bearing and non-interest bearing liabilities(3)
2,168

 
 
 
 
 
2,292

 
 
 
 
Total liabilities
41,104

 
 
 
 
 
40,949

 
 
 
 
Total shareholders’ equity
5,516

 
 
 
 
 
5,039

 
 
 
 
Total liabilities and shareholders’ equity
$
46,620

 
 
 
 
 
$
45,988

 
 
 
 
Excess of enterprise interest-earning assets over enterprise interest-bearing liabilities/Enterprise net interest income/Spread(4)
$
2,776

 
$
538

 
2.56
%
 
$
3,096

 
$
530

 
2.51
%
 
 
 
 
 
 
 
 
 
 
 
 
Enterprise net interest margin (net yield on enterprise interest-earning assets)
 
 
 
2.58
%
 
 
 
 
 
2.54
%
Ratio of enterprise interest-earning assets to enterprise interest-bearing liabilities
 
 
 
107.13
%
 
 
 
 
 
108.01
%
Return on average:(5)
 
 
 
 
 
 
 
 
 
 
 
     Total assets
 
 
 
 
1.43
%
 
 
 
 
 
0.72
%
     Total shareholders' equity
 
 
 
 
12.05
%
 
 
 
 
 
6.58
%
Average equity to average total assets
 
 
 
 
11.83
%
 
 
 
 
 
10.96
%

(1)
Nonaccrual loans are included in the average loan balances. Interest payments received on nonaccrual loans are recognized on a cash basis in operating interest income until it is doubtful that full payment will be collected, at which point payments are applied to principal.
(2)
Non-operating interest-earning and non-interest earning assets consist of property and equipment, net, goodwill, other intangibles, net and other assets that do not generate operating interest income. Some of these assets generate corporate interest income.
(3)
Non-operating interest-bearing and non-interest bearing liabilities consist of corporate debt and other liabilities that do not generate operating interest expense. Some of these liabilities generate corporate interest expense.
(4)
Enterprise net interest spread represents the taxable equivalent rate earned on average enterprise interest-earning assets less the rate paid on average enterprise interest-bearing liabilities, excluding corporate interest-earning assets and liabilities. The taxable equivalent adjustment to reconcile to net operating interest income was less than $1 million for both the three and six months ended June 30, 2015 and 2014.
(5)
Return on average ratios are calculated using net income divided by average total assets or average total shareholders' equity. Net income for the three and six months ended June 30, 2015 includes the impact of the settlement of the IRS examination.
The fluctuation in enterprise interest-earning assets is driven primarily by changes in enterprise interest-bearing liabilities, specifically deposits and customer payables. Average enterprise interest-earning assets increased 2% to $42.3 billion and decreased slightly to $41.7 billion for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The increase in average enterprise interest-earning assets for the three months ended June 30, 2015 was primarily in the held-to-maturity securities, available-for-sale securities and margin receivables categories, partially offset by a decrease in the loans and segregated cash categories, compared to the same period in 2014. The decrease for the six months ended June 30, 2015 was primarily due to decreases in loans, partially offset by increases in held-to-maturity securities and margin receivables.

8


Average enterprise interest-bearing liabilities increased 4% to $39.6 billion and 1% to $38.9 billion for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The increases in average enterprise interest-bearing liabilities were primarily due to increases in deposits, customer payables and securities loaned and other categories, partially offset by decreases in average securities sold under agreements to repurchase.
At June 30, 2015, $14.6 billion of our customers' assets were held at third party institutions, including third party banks and money market funds. Approximately 70% of these off-balance sheet assets resulted from our deleveraging efforts completed in prior periods. We estimate the impact of our deleveraging efforts on net operating interest income at June 30, 2015 to be approximately 130 basis points based on the estimated current re-investment rates on these assets, less approximately 10 basis points of cost associated with holding these assets on our balance sheet, primarily FDIC insurance premiums. We maintain the ability to transfer the majority of these customer assets back on the balance sheet with appropriate notification to the third party institutions and customer consent, as appropriate.
Enterprise net interest spread decreased by 5 basis points to 2.50% and increased by 5 basis points to 2.56% for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. Enterprise net interest spread is driven by changes in average balances and average interest rates earned or paid on those balances. During the three months ended June 30, 2015, the decrease in enterprise net interest spread was driven primarily by an increase in amortization due to faster mortgage-backed securities prepayment speeds, lower rates earned on available-for-sale and held-to-maturities securities, margin receivables and the continued run-off of loans. The decrease was partially offset by increased revenue earned from our securities lending activities and lower borrowing costs due to both a decrease in the amount and a reduction in the cost of securities sold under agreements to repurchase. During the six months ended June 30, 2015, the increase in enterprise net interest spread was driven primarily by increased revenue earned from our securities lending activities, along with lower borrowing costs due to both a decrease in the amount and a reduction in the cost of securities sold under agreements to repurchase. These increases were partially offset by lower rates earned on investment securities, margin receivables and the continued run-off of loans. Enterprise net interest spread may further fluctuate based on the size and mix of the balance sheet, as well as the impact from the interest rate environment.
Commissions
Commissions revenue decreased 2% to $103 million and 7% to $217 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The main factors that affect commissions are DARTs, average commission per trade and the number of trading days.
DART volume decreased 4% to 149,448 and 9% to 159,534 for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. Option-related DARTs as a percentage of total DARTs represented 23% of trading volume for both the three and six months ended June 30, 2015, compared to 23% and 22% for the same periods in 2014.
Average commission per trade increased 2% to $10.96 and 3% to $10.95 for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. Average commission per trade is impacted by customer mix and the different commission rates on various trade types (e.g. equities, options, fixed income, stock plan, exchange-traded funds, mutual funds, forex and cross border). Accordingly, favorable changes in customer mix and trade types impacted average commission per trade.

9


Fees and Service Charges
Fees and service charges increased 12% to $55 million and 8% to $107 million for the three and six months ended June 30, 2015 respectively, compared to the same periods in 2014. The table below shows the components of fees and service charges and the resulting variances (dollars in millions):
 
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Order flow revenue
$
21

 
$
22

 
$
(1
)
 
(5
)%
 
$
44

 
$
47

 
$
(3
)
 
(6
)%
Mutual fund service fees
6

 
6

 

 
*
 
12

 
11

 
1

 
9
 %
Advisor management fees
7

 
6

 
1

 
17
 %
 
14

 
11

 
3

 
27
 %
Foreign exchange revenue
5

 
4

 
1

 
25
 %
 
9

 
8

 
1

 
13
 %
Reorganization fees
3

 
2

 
1

 
50
 %
 
5

 
4

 
1

 
25
 %
Money market funds and sweep deposits revenue(1)
6

 
3

 
3

 
100
 %
 
11

 
6

 
5

 
83
 %
Other fees and service charges
7

 
6

 
1

 
17
 %
 
12

 
12

 

 
*
Total fees and service charges
$
55

 
$
49

 
$
6

 
12
 %
 
$
107

 
$
99

 
$
8

 
8
 %
 
*
Percentage not meaningful.
(1)
Includes revenue earned on average customer assets held by third parties outside the Company, including money market funds and sweep deposit accounts at unaffiliated financial institutions. Fees earned on these customer assets are based on the federal funds rate or LIBOR plus a negotiated spread or other contractual arrangement with the third party institutions.
The increases in fees and services charges for the three and six months ended June 30, 2015, compared to the same periods in 2014, were primarily driven by increased money market funds and sweep deposits revenue and increased advisor management fees revenue, offset by decreased order flow revenue. The increase in money market funds and sweep deposits revenue was driven primarily by the increased balance and rate earned on customer assets in money market funds, which were $7.7 billion at June 30, 2015, compared to $6.3 billion at June 30, 2014. The increase in advisor management fees was driven by assets in managed accounts within our retirement, investing and savings products, which were $3.2 billion at June 30, 2015, compared to $2.9 billion at June 30, 2014.
Principal Transactions
There was no principal transactions revenue for the six months ended June 30, 2015, compared to $10 million for the same period in 2014. Principal transactions were derived from our market making business in which we acted as a market-maker for our brokerage customers’ orders as well as orders from third party customers. On February 10, 2014, we completed the sale of the market making business and no longer generate principal transactions revenue.
Gains on Loans and Securities, Net
The table below shows the components of gains on loans and securities, net and the resulting variances (dollars in millions):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Gains on loans, net
$

 
$
7

 
$
(7
)
 
*
 
$

 
$
7

 
$
(7
)
 
*
Gains on available-for-sale securities, net
8

 
3

 
5

 
167
%
 
18

 
22

 
(4
)
 
(18
)%
Hedge ineffectiveness
3

 
(3
)
 
6

 
200
%
 
2

 
(7
)
 
9

 
129
 %
Gains on securities, net
11

 

 
11

 
*
 
20

 
15

 
5

 
33
 %
Gains on loans and securities, net
$
11

 
$
7

 
$
4

 
57
%
 
$
20

 
$
22

 
$
(2
)
 
(9
)%
*
Percentage not meaningful.
Gains on loans and securities, net increased 57% to $11 million and decreased 9% to $20 million for the three and six months ended June 30, 2015, compared to the same periods in 2014. During the second quarter of 2014, we recognized a gain of $7 million on the sale of one- to four-family loans modified as TDRs. Gains on loans and securities, net for the six months

10


ended June 30, 2014 also included a $6 million gain recognized on the sale of our remaining $17 million in amortized cost of available-for-sale non-agency CMOs in the first quarter of 2014.
Provision for Loan Losses
Provision for loan losses decreased 75% to $3 million and 50% to $8 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014, which reflected continued improvement in economic conditions and loan portfolio run-off. During the three months ended June 30, 2015, provision for loan losses also reflected enhancements to our modeling practices for the allowance for loan losses. The timing and magnitude of the provision for loan losses is affected by many factors and we anticipate variability, particularly as mortgage loans reach the end of their interest-only period. For additional information on management's estimate of the allowance for loan losses, see Summary of Critical Accounting Policies and Estimates in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Operating Expense
The components of operating expense and the resulting variances are as follows (dollars in millions):
 
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Compensation and benefits
$
118

 
$
99

 
$
19

 
19
 %
 
$
231

 
$
197

 
$
34

 
17
 %
Advertising and market development
32

 
33

 
(1
)
 
(3
)%
 
66

 
67

 
(1
)
 
(1
)%
Clearing and servicing
25

 
23

 
2

 
9
 %
 
49

 
51

 
(2
)
 
(4
)%
FDIC insurance premiums
11

 
19

 
(8
)
 
(42
)%
 
29

 
43

 
(14
)
 
(33
)%
Professional services
26

 
28

 
(2
)
 
(7
)%
 
53

 
52

 
1

 
2
 %
Occupancy and equipment
22

 
19

 
3

 
16
 %
 
43

 
37

 
6

 
16
 %
Communications
19

 
18

 
1

 
6
 %
 
38

 
36

 
2

 
6
 %
Depreciation and amortization
20

 
20

 

 
*
 
40

 
41

 
(1
)
 
(2
)%
Amortization of other intangibles
5

 
6

 
(1
)
 
(17
)%
 
10

 
11

 
(1
)
 
(9
)%
Facility restructuring and other exit activities
2

 
1

 
1

 
100
 %
 
6

 
4

 
2

 
50
 %
Other operating expenses
29

 
18

 
11

 
61
 %
 
44

 
35

 
9

 
26
 %
Total operating expense
$
309

 
$
284

 
$
25

 
9
 %
 
$
609

 
$
574

 
$
35

 
6
 %
*
Percentage not meaningful.
Compensation and Benefits
Compensation and benefits increased 19% to $118 million and 17% to $231 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The increases for the three and six months ended June 30, 2015 were primarily due to increased salaries expense driven by higher headcount and increased incentive compensation, compared to the same periods in 2014. The increases also included $6 million of executive severance costs recorded in the second quarter of 2015.
FDIC Insurance Premiums
FDIC insurance premiums decreased 42% to $11 million and 33% to $29 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The decreases were primarily driven by rate reductions due to continued improvement and quality of our balance sheet, improving capital ratios and overall risk profile, compared to the same periods in 2014.  These drivers and the resulting decreases in FDIC insurance premiums are indications of the important progress we are making on our capital plan.
Occupancy and Equipment
Occupancy and equipment increased 16% to $22 million and 16% to $43 million for the three and six months ended June 30, 2015 respectively, compared to the same periods in 2014. The increases for the three and six months ended June 30, 2015 were due to increased software maintenance and data center facilities expenses, when compared to the same periods in 2014.

11


Other Operating Expenses
Other operating expenses increased 61% to $29 million and 26% to $44 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The increases were primarily driven by a $9 million expense related to a third party contract amendment executed during the three months ended June 30, 2015.
Other Income (Expense)
Other income (expense) was $16 million and $104 million of net expense for the three and six months ended June 30, 2015, respectively, as shown in the following table (dollars in millions):
 
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Corporate interest expense
$
(15
)
 
$
(29
)
 
$
14

 
(48
)%
 
$
(36
)
 
$
(57
)
 
$
21

 
(37
)%
Losses on early extinguishment of debt

 

 

 
*
 
(73
)
 
(12
)
 
(61
)
 
508
 %
Equity in income (loss) of investments and other
(1
)
 
(1
)
 

 
*
 
5

 
2

 
3

 
150
 %
Total other income (expense)
$
(16
)
 
$
(30
)
 
$
14

 
(47
)%
 
$
(104
)
 
$
(67
)
 
$
(37
)
 
55
 %
*
Percentage not meaningful.
During the six months ended June 30, 2015, we issued $460 million of 4 5/8% Senior Notes and we used the net proceeds, together with $432 million of existing corporate cash, to redeem $800 million of 6 3/8% Senior Notes which resulted in a $73 million loss on early extinguishment of debt. This compares to a $12 million loss on early extinguishment of debt as a result of the early extinguishment of $100 million in repurchase agreements for the same period in 2014.
Total other income (expense) also includes corporate interest expense of $15 million and $36 million for three and six months ended June 30, 2015, respectively, compared to $29 million and $57 million for the same periods in 2014. The decrease in corporate interest expense was driven by $740 million in cumulative corporate debt reductions since the first quarter of 2014 which reduced our annual debt service cost from approximately $110 million as of June 30, 2014 to $50 million as of June 30, 2015.
Income Tax Expense (Benefit)
Income tax benefit was $175 million and $152 million for the three and six months ended June 30, 2015, respectively, compared to income tax expense of $43 million and $90 million for the same periods in 2014. The effective tax rate was (149)% and (84)% for the three and six months ended June 30, 2015, respectively, compared to 38% and 35% for the same periods in 2014.
In May 2015, we settled the IRS examination of our 2007, 2009 and 2010 federal tax returns resulting in the recognition of a $220 million income tax benefit in the second quarter of 2015. The income tax benefit resulted from the release of related reserves for uncertain tax positions, the majority of which increased our deferred tax assets. See Balance Sheet Overview in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on deferred tax assets at June 30, 2015. During the third quarter of 2009, we incurred a loss on the exchange of $1.7 billion interest-bearing corporate debt for non-interest-bearing convertible debentures. The uncertain tax positions were primarily related to whether certain components of that loss were considered deductible or non-deductible for tax purposes. Excluding the impact of the settled IRS examination, the effective tax rate would have been 38% for both the three and six months ended June 30, 2015, calculated in the following table (dollars in millions):
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
 
Pre-tax Income
 
Tax Expense (Benefit)
 
Tax Rate
 
Pre-tax Income
 
Tax Expense
 
Tax Rate
Income taxes and tax rate before impact of settled IRS examination
$
117


$
45

 
38
 %
 
$
180

 
$
68

 
38
 %
Impact of settled IRS examination

 
(220
)
 
(187
)%
 

 
(220
)
 
(122
)%
Income taxes and tax rate as reported
$
117

 
$
(175
)
 
(149
)%
 
$
180

 
$
(152
)
 
(84
)%

12


SEGMENT RESULTS REVIEW
We report operating results in two segments: 1) trading and investing; and 2) balance sheet management. Trading and investing includes retail brokerage products and services; investor-focused banking products; and corporate services. Balance sheet management includes the management of asset allocation; loans previously originated by the Company or purchased from third parties; deposits and customer payables; and credit, liquidity and interest rate risk for the Company as described in the Risk Management section in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Costs associated with certain functions that are centrally-managed are separately reported in a corporate/other category. For more information on our segments, see Note 15—Segment Information in Item 1. Consolidated Financial Statements (Unaudited).
Trading and Investing
The following table summarizes trading and investing financial information and key customer activity metrics as of and for the three and six months ended June 30, 2015 and 2014 (dollars in millions, except for key metrics): 
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Net operating interest income
$
178

 
$
148

 
$
30

 
20
 %
 
$
343

 
$
288

 
$
55

 
19
 %
Commissions
103

 
105

 
(2
)
 
(2
)%
 
217

 
233

 
(16
)
 
(7
)%
Fees and service charges
55

 
48

 
7

 
15
 %
 
107

 
98

 
9

 
9
 %
Principal transactions

 

 

 
*
 

 
10

 
(10
)
 
*
Other revenues
8

 
8

 

 
*
 
16

 
16

 

 
*
Total net revenue
344

 
309

 
35

 
11
 %
 
683

 
645

 
38

 
6
 %
Total operating expense
214

 
196

 
18

 
9
 %
 
417

 
391

 
26

 
7
 %
Trading and investing income
$
130

 
$
113

 
$
17

 
15
 %
 
$
266

 
$
254

 
$
12

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key Customer Activity Metrics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DARTs
149,448

 
155,194

 
(5,746
)
 
(4
)%
 
159,534

 
176,224

 
(16,690
)
 
(9
)%
Average commission per trade
$
10.96

 
$
10.72

 
$
0.24

 
2
 %
 
$
10.95

 
$
10.68

 
$
0.27

 
3
 %
Margin receivables (dollars in billions)
$
8.1

 
$
7.3

 
$
0.8

 
11
 %
 
$
8.1

 
$
7.3

 
$
0.8

 
11
 %
End of period brokerage accounts(1)
3,201,326

 
3,102,966

 
98,360

 
3
 %
 
3,201,326

 
3,102,966

 
98,360

 
3
 %
Net new brokerage accounts(1)
18,687

 
33,005

 
(14,318
)
 
(43
)%
 
57,403

 
104,907

 
(47,504
)
 
(45
)%
Annualized brokerage account attrition rate(1)
9.6
%
 
8.6
%
 
1
%
 
*
 
9.2
%
 
8.0
%
 
1.2
%
 
*
Customer assets (dollars in billions)
$
302.4

 
$
280.9

 
$
21.5

 
8
 %
 
$
302.4

 
$
280.9

 
$
21.5

 
8
 %
Net new brokerage assets (dollars in billions)
$
0.9

 
$
1.0

 
$
(0.1
)
 
(10
)%
 
$
4.4

 
$
5.1

 
$
(0.7
)
 
(14
)%
Brokerage related cash (dollars in billions)
$
42.0

 
$
40.0

 
$
2.0

 
5
 %
 
$
42.0

 
$
40.0

 
$
2.0

 
5
 %
*
Percentage not meaningful.
(1)
End of period brokerage accounts, net new brokerage accounts and annualized brokerage account attrition rate include the closure of 3,484 accounts related to the escheatment of unclaimed property and 3,325 accounts related to the shutdown of the Company’s global trading platform.
The trading and investing segment offers products and services to individual retail investors, generating revenue from these customer relationships and from corporate services activities. This segment currently generates four main sources of revenue: net operating interest income; commissions; fees and service charges; and other revenues. Net operating interest income is generated primarily from margin receivables and from a deposit transfer pricing arrangement with the balance sheet management segment. The balance sheet management segment utilizes deposits and customer payables and compensates the trading and investing segment via a market-based transfer pricing arrangement. This compensation is reflected in segment results as operating interest income for the trading and investing segment and operating interest expense for the balance sheet management segment, and is eliminated in consolidation. Other revenues include results from providing software and services

13


for managing equity compensation plans from corporate customers, as we ultimately service retail investors through these corporate relationships. For the three months ended June 30, 2015 and 2014, our brokerage products contributed 78% and 79%, respectively, and our banking products contributed 22% and 21%, respectively, of total trading and investing net revenue. For the six months ended June 30, 2015 and 2014, our brokerage products contributed 79% and 80%, respectively, and our banking products contributed 21% and 20%, respectively, of total trading and investing net revenue.
Trading and investing income increased 15% to $130 million and 5% to $266 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014, primarily driven by increased net operating interest income.
Margin receivables, a key driver of net operating interest income, increased by $0.8 billion to $8.1 billion as of June 30, 2015 when compared to the same period in 2014. Brokerage related cash, which is one of our most profitable sources of funding, increased by $2.0 billion to $42.0 billion as of June 30, 2015 when compared to the same period in 2014. Trading and investing net operating interest income increased 20% to $178 million and 19% to $343 million for the three and six months ended June 30, 2015, respectively, driven primarily by the growth in margin receivables, coupled with increased revenue earned on securities lending activities when compared to the same periods in 2014.
Trading and investing commissions revenue decreased 2% to $103 million and 7% to $217 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The decrease in commissions was primarily due to a decrease in DARTs of 4% to 149,448 and 9% to 159,534 for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014.
Trading and investing fees and service charges increased 15% to $55 million and 9% to $107 million for the three and six months ended June 30, 2015, compared to the same period in 2014. The increase in fees and services charges was driven primarily by increased money market funds and sweep deposits revenue and increased advisor management fees revenue, offset by decreased order flow revenue. The increase in money market funds and sweep deposits revenue was driven primarily by the increased balance and rate earned on customer assets in money market funds, which were $7.7 billion at June 30, 2015, compared to $6.3 billion at June 30, 2014. The increase in advisor management fees was driven by assets in managed accounts within our retirement, investing and savings products, which were $3.2 billion at June 30, 2015, compared to $2.9 billion at June 30, 2014.
There was no principal transactions revenue for the six months ended June 30, 2015, compared to $10 million for the same period in 2014. Principal transactions were derived from our market making business in which we acted as a market-maker for our brokerage customers’ orders as well as orders from third party customers. On February 10, 2014, we completed the sale of the market making business and no longer generate principal transactions revenue.
Trading and investing operating expense increased 9% to $214 million and 7% to $417 million for the three and six months ended June 30, 2015, compared to the same periods in 2014. The increases were primarily driven by a $9 million expense related to a third party contract amendment executed during the three months ended June 30, 2015. The increases were also a result of increased compensation and benefits expenses to support our strategy of accelerating the growth of the core brokerage business.
As of June 30, 2015, we had approximately 3.2 million brokerage accounts, 1.3 million stock plan accounts and 0.4 million banking accounts.     

14


Balance Sheet Management
The following table summarizes balance sheet management financial information and key financial metrics as of and for the three and six months ended June 30, 2015 and 2014 (dollars in millions):
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Net operating interest income
$
88

 
$
119

 
$
(31
)
 
(26
)%
 
$
194

 
$
242

 
$
(48
)
 
(20
)%
Fees and service charges

 
1

 
(1
)
 
*
 

 
1

 
(1
)
 
*
Gains on loans and securities, net
11

 
7

 
4

 
57
 %
 
20

 
22

 
(2
)
 
(9
)%
Other revenues
1

 
2

 
(1
)
 
(50
)%
 
3

 
3

 

 
*
Total net revenue
100

 
129

 
(29
)
 
(22
)%
 
217

 
268

 
(51
)
 
(19
)%
Provision for loan losses
3

 
12

 
(9
)
 
(75
)%
 
8

 
16

 
(8
)
 
(50
)%
Total operating expense
26

 
36

 
(10
)
 
(28
)%
 
62

 
77

 
(15
)
 
(19
)%
Balance sheet management income
$
71

 
$
81

 
$
(10
)
 
(12
)%
 
$
147

 
$
175

 
$
(28
)
 
(16
)%
Key Financial Metrics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Special mention loan delinquencies
$
143

 
$
155

 
$
(12
)
 
(8
)%
 
$
143

 
$
155

 
$
(12
)
 
(8
)%
Allowance for loan losses
$
402

 
$
401

 
$
1

 
 %
 
$
402

 
$
401

 
$
1

 
 %
*
Percentage not meaningful.
The balance sheet management segment primarily generates revenue through net operating interest income. Net operating interest income is generated from interest earned on available-for-sale and held-to-maturity securities and loans receivable, net of interest paid on wholesale borrowings and on a deposit transfer pricing arrangement with the trading and investing segment. The balance sheet management segment utilizes deposits and customer payables to invest in available-for-sale and held-to-maturity securities, and compensates the trading and investing segment via a market-based transfer pricing arrangement. This compensation is reflected in segment results as operating interest income for the trading and investing segment and operating interest expense for the balance sheet management segment and is eliminated in consolidation.
The balance sheet management segment income decreased 12% to $71 million and 16% to $147 million for the three and six months ended June 30, 2015, compared to the same periods in 2014, primarily driven by a decrease in net operating interest income, partially offset by a decrease in provision for loan losses and total operating expense.
The balance sheet management net operating interest income decreased 26% to $88 million and 20% to $194 million for the three and six months ended June 30, 2015, compared to the same periods in 2014. The decrease for the three and six months ended June 30, 2015 was driven by the decrease in the interest earned on the loan portfolio as average loan balances decreased, partially offset by the growth in average balances of our held-to-maturity securities portfolio.
Gains on loans and securities, net increased 57% to $11 million and decreased 9% to $20 million for the three and six months ended June 30, 2015 compared to 2014. During the second quarter of 2014, we recognized a gain of $7 million on the sale of one- to four-family loans modified as TDRs. Gains on loans and securities, net for the six months ended June 30, 2014, also included a $6 million gain recognized on the sale of our remaining $17 million in amortized cost of available-for-sale non-agency CMOs in the first quarter of 2014.
Provision for loan losses decreased 75% to $3 million and 50% to $8 million for the three and six months ended June 30, 2015 respectively, compared to the same periods in 2014, which reflected continued improvement in economic conditions and loan portfolio run-off. During the three months ended June 30, 2015, provision for loan losses also reflected enhancements to our modeling practices for the allowance for loan losses. The timing and magnitude of the provision for loan losses is affected by many factors and we anticipate variability, particularly as mortgage loans reach the end of their interest-only period. For additional information on management's estimate of the allowance for loan losses, see Summary of Critical Accounting Policies and Estimates in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Total balance sheet management operating expense decreased 28% to $26 million and 19% to $62 million for the three and six months ended June 30, 2015, compared to the same periods in 2014. The decrease in operating expense for the three and six months ended June 30, 2015 resulted primarily from lower FDIC insurance premiums and reduced servicing expenses due to lower loan balances compared to the same periods in 2014.

15


Corporate/Other
The following table summarizes corporate/other financial information for the three and six months ended June 30, 2015, and 2014 (dollars in millions):
 
 
Three Months Ended June 30,
 
Variance
 
Six Months Ended June 30,
 
Variance
 
 
2015 vs. 2014
 
 
2015 vs. 2014
 
2015
 
2014
 
Amount
 
%
 
2015
 
2014
 
Amount
 
%
Total net revenue
$
1

 
$

 
$
1

 
*
 
$
1

 
$

 
$
1

 
*
Compensation and benefits
40

 
27

 
13

 
48
 %
 
71

 
51

 
20

 
39
%
Professional services
13

 
12

 
1

 
8
 %
 
25

 
24

 
1

 
4
%
Occupancy and equipment
3

 
4

 
(1
)
 
(25
)%
 
7

 
7

 

 
*
Communications
1

 
1

 

 
*
 
1

 
1

 

 
*
Depreciation and amortization
5

 
4

 
1

 
25
 %
 
9

 
9

 

 
*
Facility restructuring and other exit activities
2

 
1

 
1

 
100
 %
 
6

 
4

 
2

 
50
%
Other operating expenses
5

 
3

 
2

 
67
 %